Inflation looms over ECB rate decision

FRANKFURT: Inflation will overshadow a monthly meeting of the European Central Bank here Thursday, though ECB policymakers have already acknowledged the threat and said it should recede later this year.

The bank's main interest rate will undoubtedly emerge from the gathering unchanged at 1.0 percent, a record low it first fell to in May 2009, economists say.

But ECB president Jean-Claude Trichet will also certainly comment on the latest price data, since he has highlighted in the past the bank's ability to maintain its medium-term inflation target of just below two percent.

In January, eurozone inflation jumped to 2.4 percent, and on Wednesday, the latest reading of producer prices showed them leaping by 5.3 percent on an annual basis, the sharpest increase since October 2008.

Though producers' costs were undoubtedly affected in large part by energy prices, with crude oil spiking to $103 a barrel on fears about knock-on effects of political turmoil in Egypt, the trend in eurozone inflation is clearly upwards.

The ECB's governing council forecast last month that it was "likely to stay slightly above two percent, largely owing to commodity price developments,before moderating again towards the end of the year."

Many western central banks have held lending rates at ultra-low levels to keep credit flowing to the economy, but now face a situation that could call such policies into question.

In Britain, where the Bank of England is holding its main rate at a record low of 0.50 percent, BoE governor Mervyn King has warned annual inflation could reach between four and five percent in the coming months.

Higher energy and food prices are the main drivers of inflation at present, but tax hikes approved by governments to reduce debt are pushing up costs for businesses and households as well.

That could lead to demand for higher wages, which would make ECB governors nervous but which some economists feel are necessary in some countries to sustain eurozone growth with support from beyond the industrial sector.