Inflation holds at 2.7 per cent as ECB signals rate hike

By Andrew McCathie Jun 30, 2011, 13:21 GMT

Berlin/Brussels - Annual inflation in the 17-member eurozone was unchanged at 2.7 per cent in June, preliminary data released Thursday showed as European Central Bank chief Jean-Claude Trichet once again pointed to a possible ECB rate hike next week.

Analysts had expected the European Union's statistics office Eurostat would report 2.8 per cent inflation this month after coming in at 2.7 per cent in May.

Either way, eurozone eurozone remains well above the ECB's target limit of 2 per cent.

'June's eurozone CPI inflation figures are likely to prompt the ECB to maintain a pretty hawkish tone at next week's press conference,' said Ben May, European economist at the research group Capital Economics.

He was referring to Trichet's regular monthly press conference following Thursday's meeting of the ECB's 23-strong rate-setting council.

The publication of the latest consumer price data came as part of the buildup to next Thursday's meeting of the ECB's 23-member rate-setting council.

Speaking to lawmakers in the European Parliament Thursday, Trichet again indicated that the ECB would deliver next week its second rate increase in four months as the Frankfurt-based bank grapples with the economic risks caused by renewed inflationary pressures.

He told the European Parliament's committee on economic and monetary affairs that the ECB was in 'a state of strong vigilance.' This is ECB code signalling that a rate hike is in the pipeline.

At his press conference earlier this month, Trichet also said that the bank was exercising strong vigilance when it comes to the threat posed by inflation.

The Frankfurt-based ECB's moves to press on raising the cost of borrowing comes as European leaders battle to resolve the debt crisis gripping parts of the eurozone.

Analysts are expecting the ECB to follow up April's 25-basis-points rate rise with another 25-basis-points hike at its meeting set for July 7. The ECB's benchmark refinancing rate currently stands at 1.25 per cent.

Beyond that, economists are divided about the prospects for further increases in borrowing costs in the eurozone.

While some believe that next week's increase in the cost of money will bring the ECB's tightening cycle to an end, others expect the ECB will press on with further rate rises as the rest of the year unfolds.