ECB tipped to hike rates

ECB President Jean-Claude Trichet said at the bank's last monthly meeting on June 5 that the bank is in a state of "heightened alertness" on inflation and could raise the main rate "by a small amount." He said at that meeting that members of the ECB's governing council had already made a case for raising rates even then.

Expectations are for a quarter-point increase to 4.25%, the first move since June 2007.

While Trichet has said his main objective is to keep prices stable in the euro zone - a bloc with 323 million people, and 22% of global gross domestic product - he has also recently suggested that repeated interest rate hikes are probably not likely.

Inflation has been trying central banks around the world as commodity prices have spiked in a surge of new global demand. While higher interest rates can slow economic growth as money becomes more expensive to borrow, Trichet appears to have targeted inflation as the bigger threat.

On Monday, Eurostat, the EU statistics agency, said inflation in euro nations hit a record 4% in June, double the ECB's inflation target of below or around 2%.

A rise in rates will likely send the already strong euro higher against the dollar, which will push up the price of oil as more buyers move in to buy the commodity denominated in dollars.

Trichet's job is complicated by signs of weak growth in several of the 15 euro countries. The Spanish Ministry of Labor said on Monday the number of people claiming jobless benefits in Spain rose by 36 849 in June to 2.4 million, in a clear sign of the country's rapidly cooling economy, while Italy's business lobby Confindustria said in late June it forecast the Italian economy would grow by just 0.1% in 2008.

Confindustria noted high prices for food and fuel were pinching consumption - up just 0.2% on the year, compared with a 1.4% increase last year.

Nonetheless, most analysts seem to have come to view a hike in rates as a certainty.

The "ECB should hike the refinance rate by 25 basis points, and conclude that for the time being that is enough," said Aurelio Maccario, the chief euro zone economist with UniCredit in Milan.

"However, even dismissing the possibility of a series of hikes in the short term and barring any further step-up in the current hawkish rhetoric tomorrow, the ECB will remain alert during the next few months because with oil prices still on a roll inflation will likely accelerate further after having hit 4% in June," he said.

- AP