Feb. 16 (Bloomberg) -- The European Commission raised its forecast for economic growth this year after unemployment and oil prices declined, and said inflation will slow.

The euro-area economy will expand 2.4 percent in 2007, faster than the 2.1 percent growth predicted in November, the commission, the European Union's executive arm, said in Brussels today. Consumer prices will rise 1.8 percent this year, less than the earlier forecast 2.1 percent and below the European Central Bank's 2 percent limit for the first time since 1999.

Lower oil prices and accelerating U.S. economic growth are making it more likely that the momentum in the European economy will be maintained in 2007 after the fastest expansion in six years in 2006. Sustained growth gives companies more room to raise prices and wages, which may prompt the European Central Bank to keep increasing interest rates this year.

``It's all good news,'' said Holger Schmieding, chief European economist at Bank of America in London, who this week raised his growth forecast to 2.3 percent from 2.1 percent. ``The ECB probably won't be done raising the benchmark to 3.75 percent next month.''

Banks including Morgan Stanley and Barclays Capital also raised their growth forecasts this week after figures showed euro- area growth accelerated to 0.9 percent in the fourth quarter of last year from 0.5 percent in the third. For all of 2006, the economy expanded 2.7 percent, almost double the 1.4 percent pace the year before.

Cheaper Oil

The commission's improved outlook is based on an average oil price of $59.90 a barrel in 2007. That's lower than the $66.30 forecast in November and compares with the record $78.40 reached last July. Higher energy prices contributed to a trade deficit last year by pushing up the import bill. The decline in energy costs was among the factors behind the lower inflation forecast.

``The expected easing of oil prices and the rather moderate impact of the German value-added tax hike play a key role in making the inflation outlook more optimistic in the short term,'' the commission said. The German government raised a sales tax to 19 percent from 16 percent at the start of this year, damping consumer confidence in Europe's largest economy.

Investor expectations in Germany rose for a third month in February on evidence that the effect of the tax increase will be muted and that exports will keep increasing this year. The U.S. economy, the world's largest, grew at the fastest pace in almost a year in the fourth quarter.

More Jobs

A decline in the euro-area unemployment rate to 7.5 percent in December, the lowest since records began in 1993, may also help limit a first-quarter slowdown resulting from the tax increase and higher borrowing costs.

Growth in the 13 nations using the euro will probably cool to about 0.6 percent in the current quarter before accelerating to 0.7 percent in the next three-month period, the commission said in a report on Feb. 13. For the third quarter, growth is expected to be 0.6 percent.

ECB President Jean-Claude Trichet signaled on Feb. 8 that the bank is poised to raise the benchmark refinancing rate in March for the seventh time since early December 2005 to keep inflation in check. The bank is concerned that the pace of economic growth will enable unions to push through demands for higher wages.

Most investors expect the bank to take the benchmark rate to 4 percent by the end of the third quarter. The implied rate on the three-month Euribor contract for September settlement was at 4.13 percent today.

``We'll get speculation that the ECB will go beyond 4 percent, but I think that's a very unlikely prospect,'' Ken Wattret, chief European economist at BNP Paribas in London, said before today's report. ``I don't see the underlying inflationary pressure that the ECB is worried about.''

The central bank forecasts growth of about 2.2 percent this year and average inflation at its 2 percent target. The ECB will publish new forecasts next month. The commission will release its next growth forecasts, including a breakdown of the all 27 EU countries, on May 7.

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.

Last Updated: February 16, 2007 08:24 EST