June 25 (Bloomberg) -- The European Central Bank insists it has signaled only one interest-rate increase; investors are calling its bluff.

They're betting the ECB will raise rates twice this year and most predict a third step by March, even as policy makers admonish markets for jumping the gun.

We ``didn't say that we could envisage a series'' of rate increases, ECB President Jean-Claude Trichet told the European Parliament in Brussels today. One move ``should be enough,'' Executive Board member Lorenzo Bini Smaghi said last week.

``There will be at least two rate hikes,'' said Franz Wenzel, Paris-based deputy director for investment strategy at AXA Investment Managers, which oversees $831 billion. ``Whether you call that a series or not is semantic.''

Central banks from India to South America are raising borrowing costs as climbing prices replace the global credit crunch as their biggest concern. The risk for the ECB is that higher rates spur the euro and exacerbate Europe's economic slowdown.

Trichet on June 5 said the bank may raise its benchmark rate by a quarter-point to 4.25 percent in July to curb the fastest inflation in 16 years. While some of the ECB's 21 council members have left open the option of further moves, Trichet said others are against raising rates at all.

Investors nevertheless expect at least two rate increases, Eonia forwards show. The December contract was at 4.5 percent today and the March contract was priced at 4.64 percent.

`Disagreement'

``There is disagreement among ECB policy makers about the future course of monetary policy, but one increase will simply not be enough,'' said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc in London. ``At the end of the day, inflation concerns will rule.''

The ECB's primary mandate is to achieve price stability, which it defines as inflation just below 2 percent. Inflation in the 15-nation euro area accelerated to 3.7 percent last month and, according to ECB forecasts, will average 3.4 percent this year and 2.4 percent next.

``It would not be credible for the ECB to hike just the once and then expect inflation to fall back,'' said Robert Robis, a fixed-income portfolio manager at OppenheimerFunds Inc. in New York, which manages $260 billion. ``It has its hand forced by its own mandate.''

While telling lawmakers today that the ECB doesn't ``envisage a series'' of rate steps, Trichet added: ``That being said, we never pre-commit.''

Previous Series

When the bank last started tightening policy, Trichet also said it wasn't embarking on a series of increases. It raised rates eight times between December 2005 and June 2007, doubling the benchmark to 4 percent.

Policy makers shelved a ninth increase in September to assess the economic fallout of the U.S. housing slump, which sparked a global financial-market rout.

The ECB forecasts economic expansion will slow to 1.8 percent this year and 1.5 percent in 2009. The euro's 16 percent gain against the dollar in 12 months has eroded export competitiveness.

Euro-region manufacturing and service industries contracted in June. Higher credit costs are also depressing housing markets from Spain to Ireland.

``The market believes that the ECB is willing to drive the euro-zone economy into recession to cool headline inflation,'' said Stuart Thomson, a money manager at Resolution Investment Management Ltd. in Glasgow, Scotland, which oversees $46 billion. He doesn't expect the bank to raise rates more than once.

Council Split

Bank of Spain Governor Miguel Angel Fernandez Ordonez has expressed concern about ``contractionary trends'' in his economy, which grew at the slowest pace in 13 years in the first quarter. France's Christian Noyer said today he's ``optimistic'' inflation will fall back toward 2 percent at the start of next year.

By contrast, Axel Weber of Germany, whose economy expanded at the fastest pace in 12 years in the first quarter, has highlighted ``considerable'' inflation risks.

Oil prices have doubled in 12 months to more than $130 a barrel and food prices are at records, increasing the risk of bigger wage gains to compensate for higher costs.

Inflation will ``rise to 4.1 percent in August, which would be like a red rag to a bull for the hawks,'' said Dominic Bryant, an economist at BNP Paribas in London. ``However, growth in the second quarter is likely to be close to zero, making it more difficult to get a majority for a hike in September.''

Weber May Hold Sway

Weber, one of the so-called ``hawks,'' is credited by some economists with driving the ECB's switch to a tightening bias this month. With Germany accounting for about a third of the euro- region economy, his view may hold sway.

ECB board member Juergen Stark, who like Trichet said the bank is ``not talking about a series of rate increases,'' also left the door open to more than one move. The ECB will ``do everything that is necessary to anchor inflation expectations,'' he said in an interview.

Those expectations, measured by the breakeven on five-year French inflation-indexed bonds, rose to 2.52 percent today from 2.12 percent in March.

``Inflation is out of control globally,'' said Marc Ostwald, a London-based fixed-income strategist at Anglo-Dutch bank Insinger de Beaufort SA. ``If the ECB wants to do what it says it will do, which is control inflation, it'll go more than once.''

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net

Last Updated: June 25, 2008 10:54 EDT