The European Central Bank council convened today confronted with a nightmare mix of signals of slackening growth and rising inflation in the heart of the euro area.
The ECB, meeting just two weeks after it wrong-footed financial markets with its quarter point interest rate cut, is widely expected to keep its key lending rate unchanged at 4.50 per cent.
But many analysts expect the ECB to loosen the monetary reins again late in June or July in the face of mounting evidence of faltering growth.
Earlier today, Germany said growth in the first quarter slowed to an annual rate of 2.0 per cent, the lowest since the third quarter of 1999 as capital investments declined and private and public consumption stagnated.
Economists said the data did not fully reflect the current weakness in Europe's biggest economy, which accounts for one third of euro zone's output, and saw a further slowdown ahead as signalled by yesterday's slump in the key Ifo business climate index, which fell to its lowest level in almost two years.
But the central bank faces a balancing act between responding to economic weakness, which in the longer run should dampen price pressures, and preventing a rise in inflation expectations as current headline rates keep rising.
But some economists said the continued pronounced overshoot of the ECB's tolerance limit raised the risk of rising pay demands, a scenario that the central bank is determined to prevent.
