LONDON - Central banks in Europe are likely to raise interest rates early in the new year to keep a strengthening worldwide expansion from causing inflation to accelerate.

After two years in which the United States provided almost all the world's growth, European economies are heating up and Asian nations other than Japan are emerging from recessions brought on by the currency crisis that started in July 1997 in Thailand.

"Europeans are feeling pretty good about themselves and are confident about the future, so they're spending more and saving less," said Francis Mer, chairman of Usinor SA, Europe's largest steel producer. Central bankers' concern is that the rebalancing of global growth will begin to strain capacity and, coupled with a rise in oil prices, put pressure on prices worldwide.

"This year seems likely to mark the low point in the current global inflation cycle," said Stephen Roach, chief economist at Morgan Stanley Dean Witter in New York. "Once the inflation cycle swings back to the upside, it usually takes a policy-induced slowdown to stop it."

Bank of England has all but promised to be one of the first central banks to raise rates in the new year when its Monetary Policy Committee meets Jan. 12 and 13. Analysts are forecasting that U.K. economic growth will accelerate to 3% in 2000, from a 1.9% pace this year, when unemployment fell to a 19-year low of 4.1%.

For now, central bank policies are tilted toward expansion. Real interest rates - central bank benchmark rates less current inflation - are 2.9% in the United States and just 1.4% in the 11-nation euro zone. That compares with a real rate of 4.1% in the United States in April 1998, and 2.2% for the euro zone in February. Those relatively low rates, combined with the euro's 15% decline against the dollar this year, are giving a kick-start to European growth.

The combined economies of Germany, France, and other countries in the euro zone will expand by 2.9% next year, after growing 2.1% this year, according to a European Commission forecast.

Though economic growth is likely to accelerate, economists say increased competition within the single European market is holding down costs and keeping a lid on inflation.

The European Commission expects inflation of just 1.5% next year, well below the 2% ceiling fixed by the European Central Bank.

- Bloomberg News

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