ECB set to hike as record oil prices fuel inflation (1st Lead)

Business News

Jul 3, 2008, 9:56 GMT

Frankfurt - The European Central Bank (ECB) is poised Thursday to deliver its first rate hike in about a year with Sweden raising the cost of money and oil prices rocketing up to break the record set earlier this week ahead of the ECB announcement. Amid spiralling inflation, analysts expect the ECB's 21-member rate-setting council to defy growing political opposition to a tighter monetary policy in the 15-member eurozone by raising its benchmark refinancing rate by 25 basis points to 4.25 per cent. But 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. However, ahead of the ECB announcement, oil prices bounded ahead by more than 1 per cent to breach the 145 dollars-a-barrel mark to hit a new all-time high in early European trading Thursday. The new record high came only a matter of days after oil prices climbed to an all-time high of 143.67 dollars a barrel, with soaring food and energy prices having sparked a pickup in inflation around the world. This in turn has raised concerns that central banks will be forced to raise borrowing costs just as world economic growth is losing momentum. While the members of the ECB governing council deliberated in Frankfurt, Sweden9s central bank, the Riksbank increased its benchmark repo rate by 25 basis points to 4.5 per cent with annual inflation in the nation hitting its highest rate in more than 14 years of 4 per cent in May. Adding to the deepening sense of alarm about inflation, consumer prices in Switzerland shot up to a 15-year high of 2.9 per cent in June increasing the pressure on the Swiss National Bank as it sizes up the fallout for the nation's economy of slowing global growth. Eurozone inflation also jumped 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.' 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 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.

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ECB set to hike as record oil prices fuel inflation (1st Lead)

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