Awwal 5, 1432 H/April 5, 2011, SPA -- The European Central Bank is expected to signal it thinks inflation, not debt, has become the biggest threat to the region, by raising interest rates this week as the euro zone's weakest states struggle, according to Reuters. Members of the ECB's 23-strong Governing Council have hinted repeatedly in the past few weeks that the bank will lift its key refinancing rate at a policy meeting on Thursday for the first time since July 2008. With Greece and Ireland receiving international bailouts and Portugal under heavy pressure to seek one, the rate hike will carry risks. But the central bank believes it can tighten policy slowly enough to avoid doing serious damage there. It feels re-establishing its inflation-fighting credibility is more important to avert an upward spiral of prices and wages. Euro zone inflation rose to 2.6 percent last month, above the ECB's long-term target of just below 2.0 percent, and global oil prices are hitting fresh 2-1/2 year highs. Markets therefore expect a rise in the refi rate, which the ECB uses to lend to commercial banks, of 0.25 percentage point on Thursday, from the record-low 1.00 percent to which it was cut during the global credit crisis in May 2009. They are also pricing in two more such hikes by the end of this year. "Against the background of a solid recovery, headline inflation above 2 percent and increasing inflationary expectations, it is hard to believe that a hike this week will not be the start of a tightening or at least a normalisation cycle," said Carsten Brzeski, economist at ING. -- SPA
