ECB will probably hold interest rates steady

The European Central Bank (ECB) may leave its benchmark interest rate unchanged for a 27th month after oil prices surged to record highs, stoking inflation and weighing on economic growth, a survey of economists showed.

Policy makers meeting on Thursday in Frankfurt will keep the benchmark refinancing rate at 2 percent, where it has stood since June 2003, all 36 economists in a Bloomberg survey said. Rising oil prices mean the bank may have to revise up its forecasts for inflation, council member Nicholas Garganas said on July 12.

"Oil prices are increasing inflation and raising the risk of slower growth," said Klaus Schruefer, an economist at SEB AG in Frankfurt. "The inflation forecasts should go up a tick, but the ECB won't change its forecast for a recovery" in economic growth.

Energy costs are likely to keep inflation above the bank's 2 percent limit for a sixth year this year while increasing costs for companies and leaving consumers with less money to spend.

ECB President Jean-Claude Trichet said on Aug. 5 that the bank is "vigilant" against inflation risks while the current interest rate, the lowest in six decades, is "exactly what we need" to foster expansion.

Speaking in Jackson Hole, Wyoming on Saturday, Trichet said "uncertainty" about the outlook for growth and inflation "has still fully to dissipate."

He declined to comment further ahead of this week's rate decision.

Oil prices rose 60 percent this year, reaching a record US$70.80 a barrel in New York overnight trading yesterday. Inflation accelerated to a seven-month high of 2.2 percent last month, the EU's statistics office said on Aug. 18.

The ECB will publish its quarterly inflation and growth forecasts after the rate decision.

ECB Chief Economist Otmar Issing told Il Sole/24 Ore on July 13 that the outlook for prices had worsened since June and that inflation will probably remain "slightly above" the bank's 2 percent target for the rest of this year. Money supply growth, the ECB's barometer of future inflation, accelerated to the highest rate since October 2003 last month, an ECB report from said on Friday.

Economists expect the bank to put off raising its lending rate until June next year, the median of 20 forecasts in a Bloomberg survey said. Investors are also increasing bets the ECB will lift the rate by then.

The implied rate on June 2006 interest-rate futures contract was at 2.26 percent at 8:30am in Frankfurt yesterday, compared with a 2.01 percent rate on June 27.

The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's key rate since the currency's launch in 1999. The Euribor three-month money market rate was 2.13 percent.