Ahead of the decision, short-dated eurozone government bond prices fell on Thursday, pushing yields to a fresh fifteen month high amid rising expectations of a first interest rate hike in more than two years. Yields on 10-year eurozone bonds rose to a fresh seven month high.

Investors will pay close attention to ECB chairman Jean-Claude Trichet’s comments at today’s press conference for any further hints about the central bank’s view on how inflationary pressures are evolving.

Higher oil prices have pushed the headline eurozone inflation rate up to 2.5 per cent but analysts note that the core measure of inflation (excluding energy and unprocessed food) has remained muted at 1.5 per cent.

The ECB is also known to be concerned about an increase in inflation expectations and “second round effects” as higher energy costs force workers to push for higher earnings.

Other indicators which the ECB is known to pay attention to include broad money growth (M3) which is currently growing at 8.5 per cent year-on-year, too high for comfort for some ECB members and seen as indicative of loose monetary conditions in the eurozone.

Recent survey evidence has encouraged hopes that economic recovery in the eurozone is gathering momentum despite unemployment rates in France, Germany, Greece, Belguim and Spain being around 10%.

The eurozone service-sector purchasing managers report released today showed a pick-up in activity with the headline PMI index rising to 54.9 in October from 54.7 in September, well above 50, the no change level. A further increase in the business expectations component was noteworthy after it reached its highest level since the start of the year.

On Monday, the eurozone manufacturing PMI rose sharply, reaching its highest level since September 2004.

Analysts said these combined readings were consistent with quarter-on-quarter real GDP growth around 0.5 per cent or about 2 per cent annual growth, suggesting the economy entered the fourth quarter at a strong pace.

However, HSBC cautioned that the recent improvement in the survey indicators was unlikely to be anything more than a limited industrial upturn in another eurozone mini-cycle with domestic activity set to remain lacklustre.

The futures market appears to be building in an ECB rate of 2.75 per cent by the end of 2006 and Loans Calculators wouldn’t be surprised to see this move higher still in the next few weeks.