Eurozone interest rates set to rise as inflation erupts: analysts

CEAT Kelani Holdings Managing Director Ravi Dadlani (right) and Lanka Ashok Leyland CEO Umesh Gautham exchange the OEM agreement

FRANKFURT, June 29, 2008 (AFP) – Eurozone borrowing costs are set to rise when the European Central Bank convenes Thursday, seeking to tame a fledgling inflation monster before turning its attention to slumping growth.

Interest rate cuts “will not be on the agenda until the all-clear is given on the inflation front,” Commerzbank economist Ralph Solveen said.

“Only by the turn of the year will the economy be weak enough to curb wage growth and reduce inflation risks,” he added.

With record 3.7 percent eurozone inflation shredding consumer confidence and expected to rise higher, the ECB is determined to clamp down as oil prices set new records of their own over 140 dollars a barrel.

“Price pressures are showing no signs of letting up,” noted Jennifer McKeown at Capital Economics, even as business activity begins to stagnate, signalling the start of a phenomenon known as stagflation.

Central banks normally cut interest rates to boost a slowing economy but if inflation rises, they must hike borrowing rates to keep living costs in check.

Last month, ECB president Jean-Claude Trichet said the bank could raise its main lending rate “by a small amount” in July, probably from 4.0 percent to 4.25 pe

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