ECB expected to raise rates as inflation jumps

By Marc Jones

LONDON (Reuters) - The European Central Bank is expected to raise interest rates for the first time in over a year on Thursday, following broad hints from policymakers, as it tries to cool inflation from close to boiling point.

A month ago analysts had expected the ECB to cut rates rather than to raise them, albeit later this year or in early 2009 when an economic slowdown had taken hold.

However, everything changed when President Jean-Claude Trichet told the ECB's last news conference that a small increase from the current 4.0 percent was possible in July.

A rise now seems a safe bet after euro zone inflation jumped to a record 4.0 percent year-on-year in June, the highest rate in the ECB's history and more than double its target of just under 2 percent.

A Reuters poll last week showed 95 percent of the 81 analysts surveyed expect the ECB to raise rates by 25 basis points to 4.25 percent on Thursday. In a similar poll a month ago not one economist expected rates to be higher than 4.0 percent by the end of the year.

Trichet stressed last month that nothing was certain. But ECB policymakers have since ratcheted up anti-inflation rhetoric, persuading financial markets that the ECB has finally lost patience with raging inflation.

Rocketing oil and food price rises are inflaming inflation in Europe and around the world, and the peak may still be some way off. The crude oil price galloped past $140 a barrel last week and has now doubled over the last year. Despite recent attempts by Saudi Arabia, there is also little evidence that major producers can do anything to halt the surge.

"The stronger-than-expected increase in euro zone inflation makes very grim reading for the ECB," said ING analyst Martin van Vliet. "If there were any remaining doubts about a 25 basis point rate hike on Thursday, they can now be put to rest."