The European Central Bank (ECB) will raise interest rates this week but only by a quarter of a percentage point, Bank of Scotland (Ireland) believes.

"A rate hike of 0.5 per cent would be a shock to the market and increase volatility in a market recovering from May's equity sell-off," Oliver Gilvarry of BOSI said.

All but one of 60 economists polled by Reuters in late May expected the ECB to raise rates from 2.5 per cent to 2.75 per cent when it meets on Thursday. But since the release of buoyant sentiment and inflation data, money markets have seen a higher chance of a 50 basis point rise.

However, Mr Gilvarry believes the ECB will stick with a 25 basis point rise, noting that the bank had built up a level of trust with financial markets in recent months and markets are expecting a quarter point rise.

"The ECB will be very reluctant to jeopardise that relationship by moving rates to 3 per cent instead of to the expected 2.75 per cent," he said. However, he sees further rate rises down the line with the possibility of a half a percentage point hike in September, bringing rates to 3.25 per cent, followed by a further increase in December.

Meanwhile, US investors will watch this week to see if the latest employment numbers temper inflation expectations, without sharply dimming the outlook for corporate profit growth. That would give stocks a chance to bounce back from May's sharp sell-off.

For stocks to rally, analysts say the economy needs to slow enough to calm the Federal Reserve's worries about inflation so that policy makers can end their two-year campaign of raising interest rates. Friday's job data showed hiring dropped last month, but it may have been by too much for Wall Street's liking.

"This may be an indication the Fed will have to pause at its next meeting, which in the short term, could be very supportive to stocks," said Michael Metz, chief investment strategist at Oppenheimer in New York. - (Additional reporting by Reuters)