Markets expect ECB rate rise

Europe's financial markets are braced for a rise in euro-zone interest rates later today, although opinion is divided over whether the increase will be 0.25 or 0.5 percentage points.

The European Central Bank was widely tipped to raise rates last month from the present 2.5% after comments from senior bank figures were interpreted as signalling concerns that inflationary pressures could soon increase on the back of economic growth.

But although the bank stayed its hand in October, it is expected to act this time after figures last week showed continued strong growth in money supply in the euro zone.

"Not moving at all would seem pretty odd, given the number of discussions and speeches made by the ECB recently, which has pretty much set the markets up for a move," says Kelly Tomkin, European economist at Lehman Brothers.

While some economists think the bank should raise rates by 0.5 percentage points, which would reverse the April rate cut, others argue the bank might prefer to increase rates by only 0.25 percentage points this time. This would leave it with room for a big rise in the spring if it seems pay settlements - especially in Germany - start coming in at inflation-fuelling levels.

A rates rise could help the euro - which, after threatening dollar parity in the summer before recovering to $1.09 last month, is back to about $1.05. But foreign exchange dealers think the EU recovery could help boost the euro to $1.20 next year.