The European Central Bank left interest rates steady today and said it remains on high alert in the fight against inflation, a signal that the market takes to mean another rate rise is likely in March.
"Strong vigilance remains of the essence so as to ensure that risks to price stability over the medium term do not materialise," ECB President Jean-Claude Trichet told a news conference.
"This will permit medium to longer-term inflation expectations in the euro area to remain solidly anchored at levels consistent with price stability."
The ECB has used the key word "vigilance" every month before the last six rate increases it has made since December, 2005.
Mr Trichet also said that credit costs in the euro zone remain accommodative, meaning they support growth even though the ECB has raised its key rate to 3.5 per cent over the past 14 months.
Financial markets took this language as a sure sign that the ECB would push its key rate to 3.75 per cent when it next meets on March 8th. The euro moved broadly upward to $1.3025, from $1.2995 before the news conference.
European government debt prices slipped, pushing up yields on the hawkish tone that not only warned of a March rate hike but also that further credit tightening may come later in 2007.
"The ECB are not relaxing their guard on inflation," said Mark Wall, economist at Deutsche Bank.
ECB policymakers over the past month have stressed the upward risks to inflation, including from higher wage demands, rapid money supply growth and oil prices, which have increased almost $10 per barrel in the last three weeks, despite headline inflation of less than 2 per cent.
In its February policy statement, all these concerns were repeated. Moreover, the ECB said it would look through quarterly volatility in inflation rates and stressed that inflation is likely to rise again toward the end of 2007, even though the rate recently has hovered around 1.7 to .9 per cent.
Inflation fears have also grown due to the euro zone economy's relatively strong start to 2007, despite budget tightening. Service sector growth spurted ahead, unemployment fell in Germany and France and consumer confidence stayed strong, although growth in manufacturing slowed in January.