The European Central Bank (ECB) is expected to announce its first interest rate hike since July 2008 this week even as the eurozone crisis deepens with three members missing key deficit targets.
“Only a severe escalation of the situation in Japan or a crisis in the financial markets is likely to prevent the ECB from raising rates” on Thursday, Commerzbank economist Michael Schubert said.
It would be the first change to the record low rate of 1 percent in effect since May 2009, but could raise pressure on eurozone members Greece, Ireland, Portugal and Spain.
It would also make the ECB the first leading central bank to raise its interest rate and it could drive the euro higher on foreign exchange markets.
Bank policymakers, including ECB president Jean-Claude Trichet, who flagged the rate hike last month, want to bring monetary policy back toward normal since the economy is growing and inflation is now well above target.
ECB chief economist Juergen Stark said in the Wall Street Journal Europe last month: “We need to be mindful not to keep interest rates too low for too long.”
Inflation has risen for four months running to 2.6 percent, higher than the ECB’s target of just below 2 percent, and shows little sign of stopping as oil, food and other commodity prices climb upward.
The current level of inflation, the highest since October 2008, raised the chances of more than one interest rate hike this year, economists said.
“In our view, it is obvious that more hikes will follow,” ING senior economist Carsten Brzeski said.
High prices have also begun to wear on consumer sentiment, undermining what some economists have said could be a crucial pillar of growth this year.
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