Europe braces for rate increase to check inflation

The European Central Bank may raise its key interest rate this week to keep inflation in check as economic growth accelerates and oil trades near a record, a survey of economists shows.

Policy-makers probably will raise the benchmark rate for the 12 euro nations to 3 per cent from 2.75 per cent when they convene in Frankfurt on Thursday, said all 34 economists surveyed by Bloomberg News. Economists say reports this week on manufacturing and services will show the euro-region economy is headed for the fastest expansion since 2000.

ECB President Jean-Claude Trichet indicated on June 6 the bank was ready to accelerate the pace of rate increases as higher spending by companies and consumers threatened to push up wages and prices.

An adjustment this week would come two months after the last.

Until now, the bank has acted every three months since it began raising rates in early December.

"They're signalling they want to step up the pace of rate increases to every two months," said Silvia Pepino, senior economist at JPMorgan Chase in London. Data this week "will support the case for higher rates."

Trichet said in June the bank would show "strong vigilance" on inflation, the same language he used to flag the past three rate rises. After the bank's council meets on Thursday, it will hold a news conference.

In the UK, the Bank of England probably will leave its benchmark rate unchanged at 4.5 per cent this week, according to the median of 42 forecasts. The decision will be published on Thursday after the policy council's two-day meeting in London. Economists expect the bank to raise the rate to 4.75 per cent by early next year.

Central banks around the world are raising borrowing costs to rein in inflation. The US Federal Reserve on June 29 increased its key rate for a 17th month, to 5.25 per cent from 5 per cent. The Bank of Japan raised rates on July 14 for the first time in six years.

Eurozone inflation probably held at 2.5 per cent in July, says the survey of 42 analysts. The ECB aims to keep inflation below 2 per cent.

A report out this week may show eurozone producer prices rose an annual 5.7 per cent in June, close to May's six-year high of 6 per cent.

Companies are passing on to customers the higher costs of raw materials and energy. ThyssenKrupp AG, Germany's largest steelmaker, raised its full-year profit forecast on July 19 after steel prices increased.

Crude oil reached a record US$78.40 a barrel on July 14 and traded at US$74.50 in New York late last week, up 24 per cent in the past year.

The ECB has "an axe to grind over inflation", said David Brown, Europe chief economist at Bear Stearns in London. "It's above their target and the bias is towards an acceleration.

"That's something they've got to clamp down on quickly."

The European Commission's economic growth forecasts published on July 12 suggest the EU economy will expand about 2.2 per cent this year, the fastest since 2000.

"Trichet made it plain as punch that they're going to hike rates on August 3," said Brown at Bear Stearns. Data "all support their argument that rate policy is too accommodative. The debate is whether they'll get to 3.5 per cent by the end of the year."

Investors expect the ECB will raise the benchmark rate to at least 3.25 per cent by December, futures trading shows.

- BLOOMBERG