Since the aforementioned June 5 ECB press conference, many monetary-policy-complicating events have occurred. Euro zone inflation estimates have pointed to a record high CPI increase of 4.0% in June. Purchasing managers' index data for various countries have been released and indicate a marked slowdown in economic activity across the monetary union. As a result, the aggregate euro zone PMI figures have fallen to near-record lows.

Additionally, current consumer and business sentiment indicators are pointing to deteriorating levels of confidence in the economy.

In a research note to clients, ING Wholesale Banking economist Carsten Brzeski highlighted the deteriorating economic activity reflected in the five-year low euro zone composite PMI figure, as well as the weaker-than-expected German Ifo index reported for June.

However, despite these indicators pointing to a sharp slowdown in the euro zone economies, Brzeski is convinced that the ECB will follow through with a 25 basis point rate hike on July 3.

"For the time being, the ECB will ignore the deteriorating growth outlook and will solely try to anchor inflation expectations," Brzeski said. "However, the ECB plays a risky game."

While convinced that the ECB will raise rates to prevent the materialization of second-round inflation effects, anchor inflation and reinforce its credibility, Brzeski felt that the weakening economy would prevent a series of rate hikes from starting.

"Thursday's rate hike should be a one-off to strengthen the ECB's image as inflation fighting knight," Brzeski concluded.

Barclays Capital economist Julian Callow agreed that the ECB would hike up its main refinancing rate in an effort to anchor price expectations.

"Given that the decision effectively to pre-announce on June 5th a July policy rate increase of 25bp was apparently motivated above all by the rise in inflation expectations (not just from financial markets, but in terms of wage settlements and household and corporate expectations), then, despite the sharp decline in equity markets since early June, it would seem that the Council will continue to press on and raise the policy rate on Thursday," Callow said.

With the EONIA rate reporting a 10% chance of the central bank holding rates at 4.0%, Callow did acknowledge that a minority of market participants might not be totally convinced of an interest rate increase on July 3. However, Callow emphasized that the ECB not raising rates was doubtful.

"Nonetheless, recent financial market developments probably will, in our opinion, make the Governing Council nervous about sounding too aggressive concerning future rate hike intentions."

Centrosim macroeconomic analyst Elena Stassiouk also noted the dilemma of record high inflation and weakening growth faced by the ECB these days.

However, while a vast majority of market participants and economists are expecting the central bank to focus on inflation instead of growth and hike, Stassiouk suggested that it was unlikely that the ECB would raise its refinancing rate in July.

"We believe that a rise is possible but not likely, and in any case it should serve mainly to the purpose of giving a specific message to trade unions, so that the price-wage spiral does not unfold to create further pressures on the inflation," Stassiouk said.

Stassiouk was also not entirely convinced that raising rates would even help bring down inflation.

"An interest rate rise in the situation when increase in prices is governed by exogenous factors out of control of any central bank, such as the demand of raw materials from the emerging countries, would at most be inefficient if not damaging to the economy."

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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