With inflation at record levels and upside pressures seen in wage settlements, economists and market participants alike expect the European Central Bank to raise its main refinancing rate by 25 basis points at its July 3 council meeting.

However, with oil price rises not looking to moderate any time soon and inflation estimated to reach even higher levels, many are wondering whether the ECB will stop at just one increase.

Ahead of ECB President Jean-Claude Trichet's press conference, Bank of America chief economist Holger Schmieding does not anticipate that a clear signal from the central bank regarding future policy decisions will be provided on July 3.

Schmieding noted that the hawks on the ECB council would certainly push for further tightening due to record inflation rates and strong wage growth.

However, with economic activity indicators pointing to a sharp slowdown in the economy, Schmieding suggested that the doves on the council would argue against any tightening action.

"With both doves and hawks seeing some of their worst fears coming true, we do not expect the council to reach a consensus on any follow-up to the July rate hike this Thursday¥As a result, we look for the statement to leave the rate outlook open, neither ruling out a future rate increase nor confirming market expectations of a follow-up hike in two or three months."

HSBC Securities economist Astrid Schilo is also expecting the ECB not to consign itself to any one direction in July.

"My feeling is that they start to repeat that 'we never pre-commit'," Schilo said.

However, Schilo did anticipate a "mildly hawkish tone" from Trichet and expects the ECB president to highlight the growing upside risks to inflation.

She also suggested that the ECB would not want to quell market expectations regarding further rate hikes in 2008.

"What could be quite interesting is if they decide to keep that they will 'react in a firm and timely manner'," Schilo said, noting that this phrase normally indicated a tightening cycle.

Calyon senior FX strategist Stuart Bennett is predicting that Trichet's speech is unlikely to be dovish and would certainly focus on the ECB's inflation concerns.

"There's no real problem for (the ECB) on the growth numbers. They're coming in soft, but we were told to expect them to come in soft," Bennett said, referring to the downwardly revised ECB staff projections on growth in the euro zone, published on June 5.

"Their attention is going to be on their main mandate," Bennett emphasized.

Moving to the Q&A period, Bennett anticipates one of the first questions to be whether the decision to raise rates in July was unanimous or not.

"My guess is that he's going to say 'no', " Bennett said.

"I suspect that there is still a difference of opinion within the council, especially from countries which are really starting to suffer on the growth front."

Bennett also speculated that a journalist may ask Trichet about the chances of a rate hike in August. However, Bennett doesn't believe that a hike one month after an almost certain hike in July was likely.

Nevertheless, Bennett did believe that one more rate increase in 2008 was a definite possibility.

"If they are going to focus on inflation and inflation expectations at the press conference, the conclusion at the end of Thursday afternoon is going to be a bank that going to hike in two-to-three months' time."

By Todd Wailoo, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Cristina Markham, This email address is being protected from spam bots, you need Javascript enabled to view it

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