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Last Updated: Wednesday, 30 November 2005, 13:26 GMT
ECB 'to end two-year rate hiatus'
ECB President Jean-Claude Trichet
Mr Trichet's plans to push rates higher has raised eyebrows
The European Central Bank (ECB) is widely expected to end more than two years of inactivity and ignore critics to raise interest rates on Thursday.

The move would come amid mixed economic signals from key eurozone members.

Inflation has slowed and growth is picking up, but unemployment is high in France and Germany, while consumer and business spending is still fragile.

Critics, including the Organisation for Economic Co-operation and Development, argue a rate rise would slow growth.

Strong argument

ECB President Jean-Claude Trichet has been putting the case for higher rates over the past week. On Monday, he said the threat of oil-driven inflation needed to be tackled.

The market interpreted the comments to mean that rates would rise by a quarter of a percentage point to 2.25% from 2%.

The bank should be aware of the danger of putting rates up
Luxembourg Prime Minister Jean-Claude Juncker

Despite the fact that consumer price growth did accelerate earlier this year, EU figures on Wednesday showed inflation coming down.

According to the EU's statistical office, Eurostat, consumer prices grew by an estimated annual rate of 2.4% in November, the second month in a row they would have declined.

The problem for the ECB is that it does not expect inflation to fall below its 2% limit in 2006 and 2007, and is forecasting a rise in core price growth.

That means it has to take action, say analysts, especially as economic growth seems to be more robust.

Better conditions

Eurostat said that growth in the 12 nations sharing the euro was 1.6% in the third quarter, up from 1.2% in the second.

For the EU as a whole, quarterly growth was 1.7%, up from 1.4%.

"The data will help to justify the ECB's decision to raise rates," said Capital Economics, a research company that forecasts interest rates could climb as high as 3.5% next year.

French riot police during riots in Aulnay-sous-Bois, Paris
Last month's riots dented consumer confidence in France

Worryingly for many observers, economic growth may be more fragile than it appears.

"Consumers obviously remain uncertain about their personal economic prospects and the outlook of the economy in general," said the European Commission, the EU's executive arm.

'The danger'

Reports on Wednesday showed that French consumer confidence dropped to a record low in November, following three weeks of rioting by disaffected youths that shocked the nation.

France' s unemployment was 9.7% in November, still high enough to dampen consumer confidence, analysts said.

While Germany reported better-than-expected retail sales on Wednesday, both it and France face harsh reform of their public sector spending and labour markets, which could dampen optimism in coming months.

"The bank should be aware of the danger of putting rates up," said Luxembourg Prime Minister Jean-Claude Juncker. "We've got to look at price stability and growth prospects with a degree of caution."

OECD warns on eurozone rate rise
29 Nov 05 |  Business
Trichet re-affirms ECB rate rise
21 Nov 05 |  Business
German growth boosted by exports
15 Nov 05 |  Business
ECB keeps interest rates on hold
06 Oct 05 |  Business
France's jobless recovery stalls
30 Sep 05 |  Business

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