German investor confidence surged to a 10-month high in July as robust global growth and a weaker euro offset surging oil prices, a survey by the ZEW institute showed on Tuesday. Analysts said the surprisingly strong report reduced the chances of a rate cut by the European Central Bank, which has resisted insistent calls by German politicians for lower interest rates over recent months.
"Today's data will further help remove expectations that an ECB rate cut is on the cards, in line with our long held view that rates will mostly likely be on hold throughout 2005," said Lucy Hartiss, an economist at Capital Economics in London.
The monthly survey provides a pointer to the direction of the Ifo institute's closely-watched measure of business sentiment, seen as a more accurate indicator of the health of the German economy.
Mannheim-based ZEW's expectations indicator rose to 37.0, the highest since September 2004. It was the biggest monthly gain in nearly two years and well above a consensus forecast of 22.0. The indicator was at 19.5 in June.
"The significant increase in business confidence may be due to the fact that worldwide economic activity remains stable despite high oil prices," the institute said in a statement. "Combined with a weaker euro, this generated a substantial increase in incoming orders in Germany," it added, referring to a jump in manufacturing orders in May of 2.7 percent.
The euro, which has lost 11.5 percent this year, briefly rose against the dollar and hit the day's high against the yen after the better-than-expected ZEW survey was published. Euro zone government bonds and interest rate futures extended losses.
"Oil prices do not seem to be acting as a major drag on sentiment as long as there is evidence that the global economy is resilient," said J.P. Morgan economist Silvia Peptone.
Many policymakers have warned soaring oil costs could hamper growth as the weaker euro pushes up the cost of imported crude and other raw materials priced in dollars.
Crude prices surged to a record high well above $60 a barrel earlier this month but have since fallen back to around $57.
Michael Schroeder, the ZEW's head of international finance, told CNBC television on Tuesday the rise in investor confidence in July shows the European Central Bank should keep interest rates on hold in the next six months, a view backed by analysts.