ECB expected to raise interest rates

The European Central Bank (ECB) looks certain to raise interest rates when its governing council meets on Thursday, in spite of renewed warnings from some experts that this may threaten the euro-zone economy.

Supporters of an increase have pointed to growing signs of recovery from consumer and investory sentiment surveys as well as the historically low level of present rates.

But minutes of the so-called ECB shadow council - a group of leading monetary policy experts who meet regularly to assess the appropriateness of ECB policy - show that top economists remain opposed to an increase, believing it could harm economic recovery.

The minutes, published yesterday, show that former ECB official and shadow council member Jose Luis Escriva said that a weak recovery in Europe was moderating inflationary pressure. "The moderate growth recovery expected in the euro zone will not close the output-gap, which will remain in negative territory in 2006."

Opposition to an increase on the shadow council remains strong. Seven its 18 members voted against any increase at its latest meeting last week.

But most economists agree that rates will rise on Thursday, a view copperfastened by recent positive indicators from the German economy. "Following last week's surge in the German Ifo, a hike is as good as guaranteed," Niall Dunne, financial markets strategist with Ulster Bank said yesterday.

In its latest bulletin the ECB strongly hinted that recovery in the euro zone is now strong enough to warrant a rate rise.