PARIS, Aug 22: European economic momentum is expected to slow next year in response to higher interest rates, weakening consumer demand and sluggish exports to the US, the ratings agency Standard and Poor’s predicted in a report on Tuesday.

The forecast sees a drop in foreign demand for European goods, with the 12 nations in the eurozone hurt by a strengthening of the euro against the dollar as the US Federal Reserve calls a halt to its cycle of interest rate hikes.

The agency sees the eurozone’s export growth slipping to 4.5pc next year from an expected 6.5 per cent in 2006, thereby cutting into overall economic growth.

In Britain, the agency noted that retail price inflation has remained “subdued” at 2.5 per cent, which is above the Bank of England’s 2.0pc target rate but “has not shown any sign of acceleration” as earnings growth remains moderate.

The report predicted that the Bank of England would keep its benchmark interest rate at its current level of 4.75pc until the end of the 2006.

Given an expected decline in export demand from the eurozone and the US, said S&P chief economist for Europe Jean-Michel Six, “we expect the UK economy to grow by an average of 2.5pc in real terms in 2006 and 2007 before accelerating slightly to 2.8pc in 2007.”

In Hungary, growth is seen as slipping to 2.5pc in 2007 from 4.2pc this year as the government struggles to curb an expanding budget deficit.

Momentum will also fade in the Czech Republic over the next few years as domestic demand replaces exports as the economic driver, according to S&P.—AFP