The European Central Bank kept euro zone interest rates unchanged at 4 per cent today, and will publish updated economic forecasts which analysts will scrutinise for guidance on future monetary policy.
ECB President Jean-Claude Trichet is due to comment on the competing threats of high euro zone inflation and slower growth at 1.30pm when he holds his monthly news conference and delivers a quarterly update to the bank's economic projections.
All 72 economists polled by Reuters last week expected the ECB to keep rates on hold this month for a ninth month in a row, and the euro was little moved versus the dollar, despite hitting a record high of $1.5349 earlier in the day.
Ken Wattret, BNP Paribas economist
Economists expect ECB staff to forecast lower growth but higher inflation for this year and possibly for 2009, highlighting the Governing Council's dilemma as food and energy prices climb. It is not helped by the strong euro, which holds back inflation but also hampers growth.
Annual inflation in the 15-nation region hit a record high of 3.2 per cent in January and February, dampening expectations that the ECB would soon follow other major central banks and loosen monetary policy.
Many economists believe the inflation projections will be revised up. BNP Paribas economist Ken Wattret said he expected the 2009 forecast to be raised to 1.9 or 2 per cent from the current midpoint forecast of 1.8 per cent.
A worsening inflation outlook would make it difficult for the ECB to justify lower interest rates, and mixed economic data and high uncertainty will colour the discussion.
"This is a very difficult pass for the ECB president to navigate," Wattret said. "Priority number one is to avoid markets pricing in another rate cut and then being disappointed."
Economists expect the ECB staff to cut the growth forecast as consumer sentiment has weakened in several euro zone countries and the US economic malaise is seen curbing exports.