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Euro interest rate likely to rise Eurozone rates increase to 4.25%
(1 day later)
The European Central Bank (ECB) is expected to raise interest rates from 4.0% to 4.25% in an attempt to control inflation, which is at record levels. Eurozone interest rates have increased for the first time in a year in an attempt to control inflation, which is at record levels.
The decision will be announced at 1145 GMT on Thursday and an increase would be the first for a year. Rising food and fuel costs encouraged the European Central Bank (ECB) to put its key rate up from 4% to 4.25%.
But there have been many objections to a rate rise, in particular from French President Nicolas Sarkozy. Inflation in the eurozone hit an annualised rate of 4% this week, the highest rate since official records began in 1996.
Critics have argued that the causes of inflation - rising global oil and food prices - would be unaffected. The move comes despite concerns that the eurozone economy is slowing.
Rate hints European markets had expected the rate rise - but shares rose in reaction to comments by ECB president Jean-Claude Trichet that were interpreted as a signal that this could be a one-off rate rise rather than the first of a series.
Political pressure is unlikely to sway ECB President Jean-Claude Trichet, who said in comments to appear in Thursday's Die Welt newspaper that decisive action is needed, to avoid the risk, "that inflation could explode". "The monetary policy stance after today's decision will contribute to achieving our objective of price stability," Mr Trichet said.
Figures at the beginning of the week showed that inflation in the eurozone had hit an annualised rate of 4.0%, which was well above the ECB's target of 2.0% and also the highest since official records began in 1996. "I have no bias and we are never pre-committed."
Mr Trichet hinted after the last ECB meeting that there could be a rise in July. The statement following the rise was "nowhere near" as hawkish as most had expected, said Henk Potts, a strategist at Barclays Stockbrokers.
"After having carefully examined the situation, we could decide to move our rates [by] a small amount in our next meeting in order to secure the solid anchoring of inflation expectations, taking into account the situation," he said. Weaker dollar
"I don't say it's certain. I say it's possible." There are concerns that higher interest rates could cause the economy to slow further.
Oil prices Figures released earlier on Thursday showed that the service sector of the eurozone economy, which ranges from banks to hotels, had failed to expand for the first time since June 2003.
Dr Chakib Khelil, president of the oil producers' group Opec told the BBC on Wednesday that oil prices could rise further if eurozone interest rates are raised. The eurozone Purchasing Managers Index fell to 49.1 in June, compared to 58.3 in the same month in 2007. A measure below 50 indicates the sector is contracting.
European interest rates rising makes the euro relatively more attractive to investors than other currencies, which makes it rise against the US dollar. The slowdown in Spain's service sector was particularly marked, leading some to suggest that Spain is heading for a recession.
In recent months, when that has happened, oil prices have also risen. The rise in eurozone interest rates had been expected to push oil prices higher.
The reason given is that some investors see the US currency and oil as alternative investments, so if they think the dollar is going to fall then they buy oil instead. Dr Chakib Khelil, president of the oil producers' group Opec told the BBC on Wednesday that an interest rate rise would cause the dollar to weaken further against the euro, thus making oil a more attractive investment.
This is in contrast to the previous situation, when a weak dollar was seen as a sign of a weakening US economy, which would reduce the demand for oil and hence cut the oil price. Oil prices hit record levels on Thursday in anticipation of the rate rise, with Brent crude topping $146 a barrel for the first time.
Meanwhile, the dollar had sunk to a two-month low against the euro though later made ground.
Elsewhere in Europe, Sweden's central bank also put its main lending rate up to 4.5% from 4.25% in a bid to combat inflation.
"Inflation has risen substantially and is at its highest level since the mid-1990s," the Swedish Riksbank said in a statement.
It also signalled that more interest rate rises could be on their way if world oil and food prices continued to rise.