UK and euro zone interest rates look set to diverge further. UK interest rates could rise soon and might need to go further than expectations, a member of the Bank of England's interest rate-setting monetary policy committee (MPC) signalled yesterday.

However disappointing economic data and the attacks in Madrid have rekindled speculation about a euro zone interest rate cut.

Although most economists still expect the European Central Bank (ECB) to leave interest rates at 2 per cent for the rest of the year, this week's poor business sentiment data in Germany and falling euro zone inflation suggest the ECB's next move on rates could be down.

The German Zew sentiment survey fell in February from the previous month, in part reflecting worries about a loss of competitiveness for euro zone companies following the euro's recent rise against the dollar.

Euro zone inflation fell to an annual rate of 1.6 per cent, well below the ECB's 2 per cent target.

The terrorist attack on Madrid last week reminded investors of the continued security risk.

Next week, euro zone bond investors will keep a keen eye on the influential Ifo business sentiment survey for Germany.

Many expect a fall in the headline reading, reflecting a stronger euro and disappointment with stalling stock markets.

In the UK, speaking two days after the budget, which was short on tax rises or measures to cool the housing market, Mr Paul Tucker, the Bank's executive director of markets, told an Edinburgh conference that the Bank of England's main interest rate of 4 per cent was stimulating the economy.

Mr Tucker told the National Association of Pension Funds' annual investment conference, that if, as forecast by the Treasury, growth were to be above trend.

"I for one, would expect us to continue gradually to reduce the degree of stimulus".

The nine-member MPC voted unanimously this month to hold interest rates after raising them in two quarter-point steps in February and November from their 40-year low of 3.5 per cent. - (Financial Times Service)