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Franklin Templeton predicts rate rise in eurozone

The European Central Bank may have to raise interest rates to combat rising inflation, says Franklin Templeton.

Price inflation in the eurozone hit 3.7 per cent in May, which is the highest level since the single European currency was launched in 1999.

Franklin Templeton senior vice-president of fixed income group David Zahn says this could lead the ECB to raise rates.

He says: “The ECB is aware that slowing growth has not prevented price pressures from picking up in some countries.”

Zahn, who also manages Templeton’s strategic bond fund, says the euro’s strength against the dollar has helped to keep external inflation pressures under control as most commodities are priced in dollars.

However, he suggests this could reverse in time, leaving Europe vulnerable to high commodity prices.

Zahn is increasing the weighting of corporate credit in Templeton’s European bond funds and shortening the duration of eurozone government bond exposure.

He is also underweight in government bonds, saying: “At current yields and in the current environment, they do not offer any value.”

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