(dpa) - The European Central Bank is expected to hold its nerve in the face of surging inflation as well as slowing economic growth and leave interest rates unchanged when it meets in Frankfurt next week.
The ECB has held rates at a six-year high of 4 per cent throughout the global financial crisis which emerged last year in the wake of the surge in risky subprime US mortgage defaults.
The Frankfurt-based ECB has also resolved to sit tight on rates despite the drive to cut the cost of money by other major central banks, notably the US Federal Reserve and the Bank of England.
Indeed, the Bank of England is now expected to announce Thursday it is trimming rates again by 25 basis points to 5 per cent with Fed Chairman Ben S Bernanke signalling last week that further reductions in US borrowing costs could be in the pipeline.
But with inflation in the 15-member eurozone climbing well above the ECB's 2-per-cent annual target to 3.5 per cent in March, bank chief Jean-Claude Trichet is expected to take a hawkish stance on rates at his regular monthly press conference Thursday warning again that the bank's priority remained fighting inflation.
"As inflation continues to surprise on the upside, the prospect of ECB cuts in the short term are fading," said Allan von Mehren, economist with Copenhagen-based Danske Bank said.
Despite the signs that economic growth in the eurozone is slackening, key ECB officials have also continued to warn about the threat posed by high consumer prices and the risk of unions helping to fuel inflationary pressures by pressing for higher wages.
To be sure, the renewed inflationary pressures combined with the euro's recent strong performance and the current stresses in money markets allows the Frankfurt-based bank to buy time on borrowing costs and to delay any moves towards trimming rates.
Nevertheless, many economists believe that it is now just a question of when the ECB will be forced to follow other central banks and launch a rate-cutting cycle, especially as inflation is expected to slow as the year progresses and further signs of weakening economic growth emerge.
Although several key economic indicators continue to point to the eurozone withstanding the current world economic slowdown, the International Monetary Fund said last week it expects economic growth in the currency bloc to slow to 1.3 per cent in 2008 and to 1.1 per cent in 2009. The eurozone chalked up a 2.6 per cent growth rate last year.
Meanwhile, like many analysts, Von Mehren said Danske Bank has rolled back its forecast of a 25-basis-point rate cut in June to September.
In a note to clients, German Commerzbank economist Joerg Kraemer said he now expects eurozone interest rates to fall to 3.5 per cent by the end of the first quarter next year.
Adding to the general downbeat global economic picture Fed chief Bernanke admitted Wednesday that the giant US economy would slump during the first half of the year, despite his attempts to underpin growth through a series of sweeping rate cuts.
Eurozone rates have been on hold since June last year with the ECB forced to abandon a planned 25-basis-point hike in September in the face of the financial market turmoil unleashed by the US mortgage market meltdown.
But also looming large over the eurozone is the risk of upward pressure on crude oil prices.
As the buildup got underway to next Thursday's meeting of the ECB's 21-head rate-setting council, oil prices began climbing back towards the record levels they hit last month of almost 110 dollars a barrel.
But while the latest eurozone inflation figures are likely to help push back the timetable for rate cuts, the reality is that the ECB is facing an increasingly difficult balancing act as it attempts to head off rising consumer prices just as eurozone growth projections are revised down.
Underscoring the brittle economic mood emerging across the currency bloc, the European Commission's key business and consumer survey fell more than expected last month, dragged down by the construction sector, which has been hit by concerns about falling house prices on the back of the global credit crunch.
The ECB has already launched a series of measures, often as part of coordinated moves by other central banks, aimed at shoring up confidence in European credit markets, which have been badly shaken by the US housing market upheaval.
In a further bid to ease strains in financial markets, the ECB mounted over the last week a 25-billion-euro refinancing tender aimed at heading off rises in money market rates.