The European Central Bank (ECB) has left interest rates unchanged but hinted that inflation, fuelled by wage rises, could provoke a rate hike soon.ECB president Mr Wim Duisenberg acknowledged that the recent strength of the euro and a fall in oil prices were dampening inflation. But he said it was too early to predict the medium-term impact of these developments on price stability.
"There are many uncertainties. The risks have moved in an upward direction but we need more information," he said.
Mr Duisenberg, speaking in Frankfurt after a meeting of the ECB's governing council, said the Bank was fulfilling its statutory obligation to keep inflation under control. Euro-zone inflation fell to the ECB's target level of 2 per cent last month for the first time in more than a year but is expected to rise this month.
"The medium-term perspective is that inflation will, later rather than sooner, fall below 2 per cent and stay there. The expectation for next year is that it will remain at a similar level," he said.
Mr Duisenberg welcomed the euro's recent rise against the dollar and dismissed fears that a stronger euro represented a threat to economic growth. He defended the Stability and Growth Pact and warned that all euro-zone governments must adhere strictly to its terms, including the commitment to bring budgets close to balance by 2004.
"It is vital that all member-states maintain a medium-term perspective in compliance with the framework of the Stability and Growth Pact," he said.
"Maintaining such a perspective will lead to a successful transition to budgetary positions close to balance or in surplus and to a smooth functioning of automatic stabilisers in all member-states.
"Let me therefore reiterate that the member-states concerned must honour the commitments made to achieve balanced budgets by 2003-04," he added.
Some European politicians have recently questioned the terms of the pact and British Chancellor of the Exchequer Mr Gordon Brown suggested this week that it should be interpreted more flexibly.
But Mr Duisenberg said that member-states should focus on sticking to the rules rather than changing them.
"Of course improvements could always be possible. But it's more important to adhere to the pact as it stand," he said.
