Euro zone inflation soars to record 4%

Brussels: Euro zone inflation jumped to a new record high of four per cent in June, data showed yesterday, surprising markets and cementing expectations of a European Central Bank (ECB) interest rate hike this week despite slower growth.

"It's a bit of a shocker," said Gilles Moec, an economist at Bank of America who like many economists had expected year-on-year inflation of 3.9 per cent. Euro zone interest rate futures extended falls and short-dated bond yields rose after the data.

"It's clearly going to rattle the ECB further... It certainly plays into the hands of the hawks on the ECB Governing Council," Moec said.

The four per cent year-on-year figure for price growth in the 15-nation euro in June represented a leap from May's 3.7 per cent, moving further from the ECB's target of just below two per cent, European Union statistics office Eurostat said.

It was the highest inflation figure for the currency area since measurements started in 1997.

ECB officials have given clear signs that the bank will increase its main interest rate by 0.25 percentage point to 4.25 per cent at its governing board's meeting on Thursday.

Nick Kounis, a senior economist at Fortis, said the central bank would probably have to raise rates more than once.

"We expect the widely expected July hike to be followed by further moves in Q4 of this year and in Q1 of next year, which would take the minimum bid rate up to 4.75 per cent," he said.

Other economists said they still expected only one hike.

"They [the ECB] probably will keep the language and bias towards a rate hike but we don't think they will implement another one," Juergen Michels, European economist at Citi.

The ECB wants to limit the impact of growing energy and food costs on prices in the wider economy, trying to prevent what it calls a wage-price spiral.

Central bankers attending talks at the annual meeting of the Bank for International Settlements on Sunday issued a stern warning against the dangers of surging inflation, although there was no one-size-fits-all solution.