Steady inflation and some economic softening suggest that the European Central Bank will keep its 2 per cent official interest rate unchanged at its policy meeting today.
The bank's Governing Council may even display a greater willingness than at its last meeting in September to wait well into next year before tightening credit, economists said.
Oil pushing to new records above $51 a barrel creates fresh uncertainties while data have signalled a softening recovery: the euro zone jobless rate edged up and retail sales and German export orders fell in August, while indices tracking the manufacturing and service sectors slipped in September.
"If these trends continue, you will have had a steady downward move in growth through the course of this year, which is at odds with the broadening and deepening of the recovery that the ECB has been talking about," said Mr Mark Wall, economist at Deutsche Bank in London.
Over the past month, ECB President Mr Jean-Claude Trichet has delivered an upbeat assessment of the growth and inflation outlook, consistent with the latest ECB staff projections for GDP growth around 2.3 per cent in 2005, up from about 1.7 per cent this year, and inflation falling below the ECB's 2 per cent ceiling in 2005.
But a drumbeat of warnings from ECB policymakers about the inflationary risks has taken analysts and market traders by surprise, given that evidence is scant that surging oil is pushing through into broader inflationary gains.
Fearful this heightened ECB rhetoric meant a sooner-than-expected interest rate hike, financial futures markets after the September meeting priced in a good chance of a 0.25 percentage point rate increase by the year-end, but they since have scaled back to around a 30 per cent chance.
Mr Trichet said the ECB was aware that higher oil prices are a risk to growth. And Mr Guy Quaden of Belgium noted the diverging pace of euro zone recovery, where Germany is very weak compared with countries such as Belgium - an unusual comment given that the ECB prides itself on not looking at individual countries.
Mr Joerg Kraemer, chief strategist at INVESCO Asset Management in Frankfurt, said that G7 warnings that high oil prices pose a risk to the global economy, coupled with weak euro zone data suggest the ECB will temper its rhetoric a little.
"Trichet is unlikely to step up the pressure for a rate hike. Perhaps he may sound a touch less buoyant than last month but he will give no abrupt or sudden change in the wording, just (be) somewhat softer," said Mr Kraemer.