ECB set to hike as Trichet warns of risks inflation "exploding"
Faced with spiralling inflation, the European Central Bank (ECB) is set to deliver Thursday its first rate hike in more than year, most analysts agree. ( dpa )
The ECB's 21-member rate-setting council is expected to defy growing political opposition to a tighter monetary policy in the 15- member eurozone by announcing that it had raised its benchmark refinancing rate by 25 basis points to 4.25 per cent.
But while most analysts expect the Frankfurt-based ECB to announce a rate increase Thursday, they are divided whether it will be a one-off attempt to ward off inflationary pressure or set the stage for further increases.
Powered by soaring food and energy prices, eurozone inflation shot up to a 16-year high of 4 per cent in June, preliminary data announced this week showed, with ECB chief Jean-Claude Trichet warning again of the threat posed by escalating inflation.
Inflation in the currency bloc is now double the ECB's target of "close to, but just below 2 per cent."
However since Monday's release of the latest inflation, oil prices have surged again hitting an all-time high of 143.67 dollars a barrel.
Central banks had a responsiblity to act to head off renewed inflationary pressures, Trichet told Germany's weekly Die Zeit in an interview to be published Thursday. Otherwise, he said, "there was a risk of inflation exploding."
But after placing investors on notice that the ECB was moving towards a rate hike at his press conference last month, Trichet has made clear that markets should not conclude that an increase in borrowing costs this week will form part of a series of rate hikes.
Trichet surprised markets last month by signalling that a rate hike could be in the pipeline telling his regularly press briefing that the bank's 21-head governing council was in a state of "heightened alertness" about the risks posed by inflation.
But with a rate hike this week considered a done deal, the focus of financial markets will once again be on Trichet's press briefing for indications as to the bank's future plans.
In the meantime, ECB figures released last week pointed to a sustained rise in the amount of money in circulation in the eurozone with the so-called M3 money supply chalking up a 10.5-per-cent annual rate in May. The ECB sees M3 as an indicator of future price trends.
However, coming amid signs that the eurozone economy was slowing European leaders including French President Nicolas Sarkozy, Spanish Prime Minister Jose Luis Rodriguez Zapatero and German Finance Minister Peer Steinbrueck have warned the ECB to tread carefully as it sizes up interest rate policy.