The European Central Bank is almost certain to keep rates unchanged at 2.5 percent on Thursday, putting the focus on market bets for a May interest rate increase and a faster tightening pace going forward. Manufacturing and business activity were their strongest in over five years in March and German business sentiment soared, causing analysts and financial markets to brace for a May hike.
When the Governing Council meets at 0700 GMT, it will face an economy that analysts say may be growing close to its trend rate of around 2 percent, while interest rates are barely higher than inflation. "The ECB is uncomfortable with rates where they are, and they would like to get them back to a neutral level if data supports it. They won't disabuse the market of the notion of a rise in May," said Michael Hume, an economist at Lehman Brothers.
Analysts view an April rise as improbable. ECB President Jean-Claude Trichet has repeatedly said that the central bank, which tightened credit by a quarter percentage point in March, plans no back-to-back rate hikes like the U.S. Federal Reserve.
But it is clearly uncomfortable with rates this low. Trichet recently described financing conditions as "extraordinarily favourable", and Governing Council member Yves Mersch said the central bank "cannot be careless about the risk of inflation expectations edging higher".
Sixty of 63 economists polled by Reuters last week expected the ECB to keep rates on hold this month, and 40 expected the central bank to raise rates to 2.75 percent in May. Money markets are even more aggressive and have fully priced a May hike plus a 70 percent probability of another hike in July.
However analysts are sceptical that the ECB will give strong guidance beyond May since private spending, which makes up 57 percent of euro-zone output, remains extraordinarily weak in an economy that has been expanding at 1-2 percent for over two years.
"A detailed long-term outlook would be a surprise in my view as we are still waiting for data. The ECB don't want to corner themselves," said Dirk Schumacher, economist at Goldman Sachs.