The European Central Bank is expected to announce its first interest rate hike since July 2008 this week despite the euro zone crisis deeping with three members missing key deficit targets.
It would be the first change to the record low rate of 1% in effect since May 2009 but could raise pressure on euro zone 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 in a row to 2.6%, higher than the ECB's target of just below 2%, 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.
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.
These countries include Portugal, the public deficit of which stood at 8.6% of output last year, well above the government's 7.3% target and nowhere near the theoretical European Union (EU) limit of 3%.
Greece's deficit has also probably exceeded the official estimate of 9.4%, 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.
Bank of England set to freeze interest rates
The Bank of England is forecast to maintain its key interest rate at a record-low 0.5% in a vote on Thursday.
Inflation is even higher in Britain than in the euro zone but because its recovery from recession has stalled, the Bank of England is expected to wait a while longer before embarking on a policy of rate tightening.
Recent official data showed Britain's economy shrank by 0.5% in the final quarter of 2010, while analysts have said that the government's austerity drive will hinder growth this year.
Britain's government is slashing state spending in a bid to virtually eliminate a record public deficit it inherited from the previous Labour administration after winning power last year.
Britain also faces further rises to its consumer price inflation, whose annual rate jumped to 4.4% in February, the highest level for over two years and more than double the Bank of England's official target of 2%.
In March, the BoE's Monetary Policy Committee voted 6-3 to keep rates at 0.5%, with those in favour of a rise pointing to inflationary pressures
The bank slashed interest rates to 0.5% more than two years ago, in March 2009, when it also launched a radical quantitative easing programme to help drag Britain out of a deep recession. Under the programme, the bank has created some £200 billion of new money by purchasing government bonds and high-quality private sector assets so as to give the economy an added boost.
Britain's recession, sparked by the global financial crisis, ended in the final quarter of 2009.
