LONDON (Reuters (LSE: TRIL.L - news) ) - The European Central Bank is expected to raise interest rates for the first time in over a year on Thursday, following broad hints from policymakers, as it tries to cool inflation from close to boiling point.

A month ago analysts had expected the ECB to cut rates rather than to raise them, albeit later this year or in early 2009 when an economic slowdown had taken hold.

However, everything changed when President Jean-Claude Trichet told the ECB's last news conference that a small increase from the current 4.0 percent was possible in July.

A rise now seems a safe bet after euro zone inflation jumped to a record 4.0 percent year-on-year in June, the highest rate in the ECB's history and more than double its target of just under 2 percent.

A Reuters poll last week showed 95 percent of the 81 analysts surveyed expect the ECB to raise rates by 25 basis points to 4.25 percent on Thursday. In a similar poll a month ago not one economist expected rates to be higher than 4.0 percent by the end of the year.

Trichet stressed last month that nothing was certain. But ECB policymakers have since ratcheted up anti-inflation rhetoric, persuading financial markets that the ECB has finally lost patience with raging inflation.

Rocketing oil and food price rises are inflaming inflation in Europe and around the world, and the peak may still be some way off. The crude oil price galloped past $140 a barrel last week and has now doubled over the last year. Despite recent attempts by Saudi Arabia, there is also little evidence that major producers can do anything to halt the surge.

"The stronger-than-expected increase in euro zone inflation makes very grim reading for the ECB," said ING analyst Martin van Vliet. "If there were any remaining doubts about a 25 basis point rate hike on Thursday, they can now be put to rest."

"With headline inflation double the ECB's medium-term target, the bank seems to have concluded that enough is enough and that the time has come to protect its inflation-fighting credibility," he added.

JUST JULY

Last week comments from ECB policymakers Miguel Angel Fernandez Ordonez, Jose Manuel Gonzalez-Paramo (Stuttgart: 896541 - news) , Athanasios Orphanides, Juergen Stark and Klaus Liebscher all bolstered expectations of a rate rise.

However, most played down talk of a series of increases. "There exists the possibility of a moderate rise in interest rates in July. We were speaking about July, just July, let's not make conjectures about August," Executive Board Member Gonzalez-Paramo said.

Bank of Spain Governor Ordonez was equally direct. "The only thing we said refers to the next meeting. We made that crystal clear. Many of us clarified that when people thought we were starting a rate hike (series)," he said.

Despite such talk, financial markets are still betting that inflation will force the ECB to raise rates again before the year is out.

With interbank lending rates still close to 5 percent, some people argue that a rise to 4.25 percent would simply be designed to make the ECB look tough, and would have little real impact.

PAIN IN SPAIN

Politicians are becoming increasingly worried about Europeans' standard of living, and whether a rate rise could hit voters' confidence and their own popularity. At the weekend senior politicians in Germany, Spain and France all cautioned the ECB against stifling euro zone economic growth.

German Finance Minister Peer Steinbrueck dropped his normal reluctance to comment on monetary policy, saying that higher rates risked worsening any slowdown.

Spanish Prime Minister Jose Luis Rodriguez Zapatero hit a similar tone. "It (the ECB) has to have a certain flexibility, especially as European inflation comes essentially from the price of oil and food, not from an excess of internal demand," he said.

The latest round of data appears to back up their concerns. Consumer confidence across the region is buckling, manufacturing and service sector activity contracted in June, and protests against record prices are on the rise.

French consumer confidence hit a record low for the sixth straight month, and Italian and German consumer morale was much weaker than expected. In Spain, where a housing bust has hit once-strong growth, consumer confidence also hit an historic low.

The ECB is less pessimistic. Backed up by projections from its own economists, it is becoming increasing confident that any euro zone slowdown will be brief. Policymakers also hope the credit crunch is losing its ferocity.

(Reporting by Marc Jones; editing by David Stamp)