Inflation set to top ECB agenda

[February 03, 2011]  BERLIN (AP) -- The European Central Bank's response to above-target inflation is in the spotlight as it meets to consider interest rates Thursday amid something of a respite from fears about the eurozone debt crisis.

The ECB is expected to leave interest rates untouched for the 21st consecutive month at a record low of 1 percent. However, rising inflation has prompted a return of tough talk from the bank on price pressures -- and questions about when the cost of borrowing might rise.

Inflation has always been its main concern, but one that took a back seat in public as the ECB took a prominent role in fighting the financial and debt crises.

Eurozone consumer prices were up 2.4 percent in year-on-year terms in January, up from December's 2.2 percent gain and a 27-month high. The ECB's mandate is to keep inflation close to, but below 2 percent.

That comes at a time of increasing global concern about inflation, which hit 3.7 percent in Britain in December, while China is expected to raise interest rates this month to cool its overheating economy.

Analysts say that, while bank president Jean-Claude Trichet may step up his rhetoric on inflation a notch after warning last month of further upward pressure -- for example from oil prices -- the ECB isn't about to raise rates just yet.

Higher rates can ward off inflation, but could dampen growth and the economic recovery if done too soon. Several countries in Europe have embarked on tough spending cuts and tax increases to get their public finances back in shape.

For now, the ECB is likely to stick to its view that inflation in the 17-nation eurozone will fall back to its target level later in the year, IHS Global Insight economist Howard Archer said.

"The ECB is also very aware that higher interest rates are the last thing that Ireland, Greece, Portugal, Spain and Italy need," he added, referring to the countries whose debt-related troubles are causing the most concerns.

"We currently expect the ECB to hold off from raising interest rates until the fourth quarter of 2011 and then raise them only gradually," Archer said.

The ECB's return to tough talk on inflation has helped push the euro back up to near three-month highs against the dollar, since the U.S. Federal Reserve shows no sign of raising its own near-zero rates.

Markets suspect that Trichet may not want to toughen his language on inflation much further at this point, given that a stronger euro wouldn't be popular with European exporters.

[Associated Press]

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.