PREVIEW-ECB expected to raise rates as inflation jumps

Tag : Boiling Point
Germany - * What: ECB July interest rate decision
* When: Thursday, July 3. Announcement 1145 GMT, news conference1230 GMT
* Economists expect ECB to raise rates to 4.25 percent from 4.0percent

By Marc Jones
LONDON, June 30 (Reuters) - The European Central Bank is expectedto raise interest rates for the first time in over a year onThursday, following broad hints from policymakers, as it tries tocool inflation from close to boiling point.
A month ago analysts had expected the ECB to cut rates rather thanto raise them, albeit later this year or in early 2009 when aneconomic slowdown had taken hold.
However, everything changed when President Jean-Claude Trichet toldthe ECB's last news conference that a small increase from thecurrent 4.0 percent was possible in July.
A rise now seems a safe bet after euro zone inflation jumped to arecord 4.0 percent year-on-year in June, the highest rate in theECB's history and more than double its target of just under 2percent.
A Reuters poll last week showed 95 percent of the 81 analystssurveyed expect the ECB to raise rates by 25 basis points to 4.25percent on Thursday. In a similar poll a month ago not oneeconomist expected rates to be higher than 4.0 percent by the endof the year. (For details please double click on)
Trichet stressed last month that nothing was certain. But ECBpolicymakers have since ratcheted up anti-inflation rhetoric,persuading financial markets that the ECB has finally lost patiencewith raging inflation.
Rocketing oil and food price rises are inflaming inflation inEurope and around the world, and the peak may still be some wayoff. The crude oil price galloped past $140 a barrel last week andhas now doubled over the last year. Despite recent attempts bySaudi Arabia, there is also little evidence that major producerscan do anything to halt the surge.
"The stronger-than-expected increase in euro zone inflation makesvery grim reading for the ECB," said ING (nyse: IND - news - people ) analyst Martin van Vliet. "If there were any remaining doubtsabout a 25 basis point rate hike on Thursday, they can now be putto rest."
"With headline inflation double the ECB's medium-term target, thebank seems to have concluded that enough is enough and that thetime has come to protect its inflation-fighting credibility," headded.

JUST JULY
Last week comments from ECB policymakers Miguel Angel FernandezOrdonez, Jose Manuel Gonzalez-Paramo, Athanasios Orphanides,Juergen Stark and Klaus Liebscher all bolstered expectations of arate rise.
However, most played down talk of a series of increases. "Thereexists the possibility of a moderate rise in interest rates inJuly. We were speaking about July, just July, let's not makeconjectures about August," Executive Board Member Gonzalez-Paramosaid.
Bank of Spain Governor Ordonez was equally direct. "The only thingwe said refers to the next meeting. We made that crystal clear.Many of us clarified that when people thought we were starting arate hike (series)," he said.
Despite such talk, financial markets are still betting thatinflation will force the ECB to raise rates again before the yearis out.
With interbank lending rates still close to 5 percent, some peopleargue that a rise to 4.25 percent would simply be designed to makethe ECB look tough, and would have little real impact.

PAIN IN SPAIN
Politicians are becoming increasingly worried about Europeans'standard of living, and whether a rate rise could hit voters'confidence and their own popularity. At the weekend seniorpoliticians in Germany, Spain and France all cautioned the ECBagainst stifling euro zone economic growth.
German Finance Minister Peer Steinbrueck dropped his normalreluctance to comment on monetary policy, saying that higher ratesrisked worsening any slowdown.
Spanish Prime Minister Jose Luis Rodriguez Zapatero hit a similartone. "It (the ECB) has to have a certain flexibility, especiallyas European inflation comes essentially from the price of oil andfood, not from an excess of internal demand," he said.
The latest round of data appears to back up their concerns.Consumer confidence across the region is buckling, manufacturingand service sector activity contracted in June, and protestsagainst record prices are on the rise.
French consumer confidence hit a record low for the sixth straightmonth, and Italian and German consumer morale was much weaker thanexpected. In Spain, where a housing bust has hit once-stronggrowth, consumer confidence also hit an historic low.
The ECB is less pessimistic. Backed up by projections from its owneconomists, it is becoming increasing confident that any euro zoneslowdown will be brief. Policymakers also hope the credit crunch islosing its ferocity. (Reporting by Marc Jones; editing by DavidStamp) Copyright 2008 Reuters, Click for Restriction
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