July 1 (Bloomberg) -- The European Central Bank and the Federal Reserve are reacting differently to the threat of faster inflation, with policy makers in Europe likely to backtrack after raising interest rates, according to Deutsche Bank AG economists.

``Recent and prospective differences between the Fed and the ECB in the conduct of monetary policy have been striking,'' the analysts, led by chief U.S. economist Peter Hooper, wrote in a report published yesterday. ``The ECB has launched a Martian frontal assault on inflation while the Fed has opted for a more cautious and patient Venusian approach.''

The chart of the day shows the recent jump in expectations for how much inflation will accelerate and how high interest rates will rise. The top chart shows breakeven rates in the U.S. and Italy, measuring the yield gap between ordinary government debt and inflation-protected securities. The bottom chart shows the three-month futures contracts for December settlement.

``The historical experience of deflation and depression in the U.S., and of German hyperinflation and currency reform in Europe, plays a key role in shaping different responses,'' the economists wrote. ``We expect the present trans-Atlantic monetary policy divergence to diminish when weaker economic growth eventually reduces inflation fears at the ECB. The ECB will lower rates in the course of 2009, while the Fed will probably keep rates on hold.''

The ECB will raise its key rate by a quarter-point to 4.25 percent when it meets this week, according to 57 of 58 economists surveyed by Bloomberg News. There's a 75 percent chance that the Fed will keep its benchmark rate at 2 percent when it next sets policy on Aug. 5, according to prices in the futures market.

To contact the reporter on this story: Mark Gilbert in London at magilbert@bloomberg.net

Last Updated: July 1, 2008 06:35 EDT