ECB appears set for landmark interest rate hike
"Only a severe escalation of the situation in Japan or a crisis in the financial markets is likely to prevent the ECB from raising rates" on Thursday, Commerzbank economist Michael Schubert said.
It would be the first change to the record low rate of 1.0 percent in effect since May 2009 but could raise pressure on eurozone members Greece, Ireland, Portugal and Spain.
It would also make the ECB the first leading central bank to raise its interest rate, and could drive the euro higher on foreign exchange markets.
Bank policymakers, including president Jean-Claude Trichet who flagged the rate hike last month, want to bring monetary policy back towards normal since the economy is growing and inflation is now well above target.
ECB chief economist Juergen Stark said in the Wall Street Journal Europe last month: "We need to be mindful not to keep interest rates too low for too long."
Inflation has risen for four months running to 2.6 percent, higher than the ECB's target of just below 2.0 percent, and shows little sign of stopping as oil, food and other commodity prices climb upwards.
The current level of inflation, the highest since October 2008, raised the chances of more than one interest rate hike this year, economists said.
"In our view it is obvious that more hikes will follow," ING senior economist Carsten Brzeski commented.
High prices have also begun to wear on consumer sentiment, undermining what some economists have said could be a crucial pillar of growth this year.
But higher rates could have the biggest effect on countries that can least afford them, those struggling with acute debt levels and high unemployment.
"The countries already suffering at the eurozone periphery will be hurt the most by higher ECB rates," Brzeski warned.
They included Portugal, the public deficit of which stood at 8.6 percent of output last year, well above the government's 7.3 percent target and nowhere near the theoretical European Union (EU) limit of 3.0 percent.
Portugal will hold early general elections on June 5, after hitting a political impasse over proposed austerity measures, President Anibal Cavaco Silva said Friday.
Greece's deficit has also probably exceeded the official estimate of 9.4 percent, its finance minister said last week, amid signs that efforts to boost tax collection were failing.
And Spain, which analysts say has worked hard to correct its financial situation, will miss its deficit targets this year and next, the Spanish central bank has forecast.
Finally, Ireland revealed last week that its entire banking sector needs a drastic overhaul, with the cost of bailing out commercial lenders set to top 70 billion euros (US$99 billion).
The ECB said Thursday it would accept all bonds issued or guaranteed by the Irish government as collateral for central bank loans, easing some pressure on Irish banks.
Meanwhile, EU leaders have approved measures to prevent a repeat of the eurozone's debt saga, but their response has been overshadowed by rising expectations that Portugal will still need a bailout.
The new EU plan includes the creation of a permanent fund -- the European Stability Mechanism -- to help eurozone members that hit trouble, in a bid to shore up the single currency for the future.
Somewhat reassured markets pushed the value of the euro up to around 1.41 US dollars, making it a bit harder for weak economies to boost exports and raise tax revenues.
"Accordingly, it may even increase the chances of one or more of the most fiscally challenged economies restructuring its debts," said economist Ben May at Capital Economics.
Observers are now wondering whether the expected ECB rate hike will be the first of a series, with several saying a normal rate given improved economic conditions and inflation would be around 2.0 percent.
The latest eurozone purchasing managers index eased in March from a 10-year peak in February but remained at a level that indicated further growth, while unemployment finally fell below 10 percent.
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