1:37 AM
FRANKFURT |
FRANKFURT (Reuters) - The European Central Bank is poised to raise interest rates from a record low 1.0 percent on Thursday and more is likely to follow but, fearful of heaping more pain on the euro zone's stragglers, it will give few clues about when the next move will come.
ECB policymakers have been out in force in recent weeks flagging a rise that will be their first since July 2008. All but four of 80 economists polled by Reuters last week expected it to raise rates by 25 basis points.
The policy making Governing Council began meeting at 0700 GMT. Its rate decision -- due at 1145 GMT -- will come less than 24 hours after Portugal announced it was seeking European Union support, a decision long expected by financial markets.
Lisbon's announcement has not changed market expectations for a rise in rates but ECB President Jean-Claude Trichet's news conference at 1230 GMT will be eyed for signs markets are still justified in expecting more than one further move this year.
The ECB is concerned that firm oil prices -- near 2-1/2 year highs -- could boost inflation expectations but the Frankfurt-based bank must be careful not to hurt the euro zone's struggling peripheral economies by jacking up rates fast.
Trichet, who shocked markets last month by signaling an April rate hike, will not want to heighten expectations for further rises.
Markets are already pricing in two further rises in the main refinancing rate to 1.75 percent by the year's end.
"I think it is the start of a series but I think Trichet ... will try to temper any market expectations, which are already priced in, of further hikes to come," said Lloyds interest rate strategist Eric Wand.
Bank-to-bank lending rates have already risen on rate hike expectations. The three-month Euribor rate has risen 25 basis points since the start of the year and hit its highest level since June 2009 on Wednesday.
With Greece, Ireland and Portugal all being forced to rely on international bailouts and struggling to generate growth, the rate hike will carry risks. But the central bank believes it can tighten policy slowly enough to avoid doing serious damage.
It feels re-establishing its inflation-fighting credibility is more important to avert an upward spiral of prices and wages. Euro zone inflation rose to 2.6 percent last month, above the ECB's medium-term target of just below 2.0 percent.
"Typically, rate expectations move very quickly once the hiking cycle starts and I think Trichet knows the recovery is still quite fragile on the euro area aggregate -- the periphery is still struggling," said Nomura economist Jens Sondergaard.
"It's a tricky act for them. They don't want to signal that this is the start of a hiking cycle. On the other hand, I don't think they can be too complacent on inflation at the moment."
The euro slipped from recent peaks ahead of the meeting.
"The euro has rallied considerably on the ECB rate hike view but it may be the case of buy the rumor sell on the fact," said Koji Fukaya, chief FX strategist at Credit Suisse.
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