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ECB tipped to hold rates but set stage for monetary tightening

The European Central Bank is widely tipped to leave interest rates on hold Thursday but with ECB chief Jean-Claude Trichet expected to lay the foundations for increasing the cost of money in the coming months.

The European Central Bank’s 19-head rate-setting council last month delivered its seventh rise in borrowing costs since launching its current rate-hiking cycle in December 2005, raising its benchmark refinancing rate by 25 basis points to 3.75%. But as recently as last week, Trichet signaled that the bank was planning to increase rates again by repeating comments he made at his regular press conference last month, declaring the 13-member eurozone’s monetary policy to be ‘moderate’ and ‘accommodative.’

Trichet’s comments were widely seen as setting the stage for the ECB to deliver another 25-basis points increase at its meeting in June. This would raise the refinancing rate 4.0% and possibly take rates to their peak. Since the bank’s last meeting, however, evidence about the solid pickup in the European economy has continued to emerge, triggering renewed speculation about the ECB’s plans for raising borrowing costs. Consequently, the publication of a slew of forecast-beating eurozone economic data combined with ECB warnings about the threat of renewed inflationary pressures have meant that a growing number of analysts are now not ruling out that the bank will go further, possibly pushing rates up to 4.25% or to 4.5% by 2008.

As a result, the market focus will be on Trichet’s press conference Thursday following the bank’s governing council meeting for pointers to how the bank sees monetary policy unfolding this year. Talk about a more hardline approach to monetary policy emerging at the ECB has helped to underpin the euro, which has gained against both the dollar in the run-up to the bank’s Thursday meeting with the common currency edging its way up towards the critical 1.35 mark against the greenback. (news.monstersandcritics.com)