ECB set to anger eurozone with rise in rates

Jean-Claude Trichet, the president of the European Central Bank, is preparing to risk the wrath of eurozone governments this week by raising interest rates in the 12-country currency bloc for the first time in five years.

After two years with interest rates stuck at 2 per cent, the ECB is keen to establish its inflation-fighting credentials, and Trichet has clearly signalled that rates will go up on Thursday.

'They've got monetary pins and needles,' said David Brown, chief european economist at Bear Stearns. 'They've been sitting on their hands for 29 consecutive months.'

He believes the ECB could even raise rates by half a percentage point instead of the quarter point the market is expecting, and then 'batten down the hatches against the political backlash'.

French finance minister Thierry Breton last week became the latest politician to question the ECB's anti-inflation zeal. 'I remain, like my European counterparts, not very convinced of the need for such an increase now,' he said. Policymakers in sluggish economies such as Germany and France are nervous that higher rates could jeopardise a nascent recovery.

The ECB has been warning for months that it might push up borrowing costs, but Trichet surprised the markets earlier this month by appearing to pre-empt the decision.

'After two-and-a-half years of maintaining historically low interest rates, I consider that the governing council is ready to take a decision on interest rates,' he said - although he suggested last week that Thursday's move is unlikely to be the first of many.

Economists say there is little sign of core inflation rising across the eurozone, despite the jump in oil prices. 'They're being very pre-emptive. They're pre-empting not just a pick-up in inflation, but a pick-up in inflation expectations,' said Julian Jessop, of Capital Economics.

Erik Nielsen, chief european economist at Goldman Sachs, said: 'Rates at 2 per cent are artificially low. Any central bank would want to do what it could to bring them back towards something like normal,' he said.