Markets are bracing for a euro zone interest rate hike tomorrow, with the European Central Bank tipped to resist pressure from politicians who want to it focus on spurring growth and not just inflation.
Analysts have begun to ask whether insatiable inflation could push borrowing costs even higher in the months to come. They are betting on a 25 basis point rate increase tomorrow.
That would put the European Central Bank's key lending rate at 4.25%, a move telegraphed last month by ECB president Jean-Claude Trichet to signal the bank was serious about keeping inflation in check.
But politicians have a different agenda, and French President Nicolas Sarkozy, Spanish Prime Minister Jose Luis Rodriguez Zapatero and German Finance Minister Peer Steinbrueck have pressed the ECB to think about the impact that higher lending rates will have on business activity and consumer sentiment.
'The ECB should take into account the consequences of an interest rate hike,' Steinbrueck said yesterday, having earlier warned that a rate increase 'could reinforce an economic slowdown.'
Speaking on Monday night, a day before France assumed the rotating European Union presidency, Sarkozy said: 'I think the ECB, whose independence must be preserved, should ask itself about growth in Europe and not simply inflation.'
Zapatero over the weekend urged the ECB to show 'flexibility' in its monetary policy.
Consumers have gotten squeezed as oil prices, which are now above $140 a barrel, undermine their purchasing power, and no political figure dares hold out hope of relief anytime soon.
Spiking energy costs pushed euro zone inflation up by a record 4% in June, and many economists expect increases to hit at least 4.2% in August or September as oil gushes ever higher.
That has underpinned the ECB's position that inflation, and especially expectations of further price increases, must be controlled to provide a basis for durable economic growth. The ECB has a mandate to provide stable prices and has an inflation target of just below 2%.
