Euro-zone annual inflation held well above the European Central Bank's target in July while economic sentiment surprised on the upside, cementing expectations the bank will raise interest rates on Thursday.
Inflation in the 12 countries using the euro was 2.5 per cent year-on-year, the European Union's statistics office estimated yesterday, unchanged from June and in line with expectations.
Economic sentiment in the euro zone rose to 107.7 points in July from a revised 107.1 in June, the European Commission said, the strongest reading since early 2001.
This beat market expectations of a slight decline to 107.0, pointing to a strong start to the second half of the year after an investment- and export-driven rebound in the first half.
"The overall take on this seems to be very positive and, going into the ECB meeting this week, nails the case for a 25-basis-point increase on Thursday," said Kenneth Broux, economist at Lloyds TSB.
Economists expect the cost of credit to increase to 3 per cent on Thursday, and then again by 25 basis points in October and December for a year-end figure of 3.5 per cent.
The ECB is expected to raise rates to stem inflationary pressures from high oil prices and fast credit growth as the euro-zone economy accelerates.
Economists said headline inflation was likely fuelled by a surge in oil prices and drought, which underpinned food prices.
The ECB wants to keep inflation just below 2 per cent, and some economists said the rising sentiment coupled with above-target inflation could make it quicken the pace of rate rises.
