ECB to talk tough on inflation threat

Frankfurt - The European Central Bank meets Thursday with surging inflation expected to result in the ECB leaving rates on hold at 4.0 per cent for the 12th month in a row.

Indeed, the ECB this week marked the 10th anniversary of its founding caught between a rock and a hard place with inflation fears emerging amid signs that economic growth is losing its momentum.

"The ECB is facing a difficult tightrope walk," said Michael Schubert, economist with Germany's Commerzbank.

But with data released last week showing inflation in the 15- member eurozone jumping to a 16-year high of 3.6 per cent in May, ECB chief Jean-Claude Trichet is likely to use his press conference Thursday to talk tough about the threat posed by inflation.

This has already helped to spark market speculation that instead of following the lead of other major central banks, notably the US Federal Reserve, towards lower borrowing costs, the next rate move by the hawkish ECB could be a hike.

That said, however, the causes of the latest pickup in inflation - soaring food and oil prices - lie outside the reach of the ECB's monetary policy.

As a result, most analysts have abandoned previous forecasts of an ECB push to trim its benchmark refinancing rate this year and are now expecting the Frankfurt-based ECB to sit tight on monetary policy into 2009.

In comments in the run-up to Thursday's meeting, Austrian central bank chief and ECB council member Klaus Liebscher and Trichet made clear that the bank was not about to consider relaxing its hardline anti-inflation stance.

While Trichet told the online news service Mediapart that it was no time for complacency, Liebscher told Austrian radio ORF inflation in the eurozone was "very, very high" adding that this made "our mandate of price stability more urgent."

To be sure, the May rise in consumer prices helped to drive inflation further away from the ECB's target of keeping inflation close to but just below 2 per cent, which also lies at the heart of its prime objective for price stability.

Moreover, since the bank's last meeting of the 21-member rate setting council about four weeks ago, data have helped to reinforce the bank's inflation concerns, especially with oil prices hitting a record high of 135.09 dollars a barrel and figures showing soaring food prices.

Data released Monday by the European Union's statistics office showed annual food prices in the eurozone rising by 6.2 per cent in April compared with what was then a 3.3-per-cent inflation rate.

Signs of resurgent inflation could also force the ECB to revise up its consumer price predictions for this year and 2009 when it publishes it latest quarterly staff projections for economic growth and inflation on Thursday.

Some economists are expecting eurozone inflation to continue edging up towards 4.0 per cent in the coming months. The ECB staff projections released in March predicted that inflation in the eurozone would average 2.9 per cent this year and 2.1 per cent in 2009.

At the same time, the strength of the euro, which hit to an all- time high topping 1.60 dollars in April, has helped to tighten monetary conditions in the eurozone.

This in turn has allowed the ECB to buy time on rates and to stick to its current 4.0 per cent throughout the world financial market and credit crisis unleashed by the upheaval in the US mortgage sector.

The ECB's growth forecasts could also face a downward revision on Thursday as the ripples from the financial crisis and inflation fears undercut global growth.

However, Germany's key plant and machinery industry reported Monday that booming foreign demand resulted in a 35-per-cent jump in orders.

In the meantime, the International Monetary Fund revised up its 2008 eurozone growth forecast to 1.75 per cent from a previous 1.4 per cent. The currency bloc chalked up a 2.6 per cent expansion rate in 2007, but the IMF expects growth to slow to 1.25 per cent in 2007.

Nevertheless, the European Commission's closely watched economic sentiment survey remains stuck at almost a three-year low and German retail sales have slumped and seasonally unadjusted unemployment in Europe's biggest economy has risen.

What is more, the ECB's economic management tasks are being complicated by a sharp growth divergence across the eurozone.

While solid export demand from emerging economies has helped to power German growth, the credit crunch has badly hit key euro member states such as Spain, Ireland, and France where up until recently booming property markets have been a driving economic force. (dpa)