The European Central Bank (ECB) said this morning it is monitoring inflation risks closely and remains ready to raise interest rates further if necessary.
"The governing council will continue to monitor closely all developments to ensure that risks to price stability over the medium term do not materialise," the ECB said in its July monthly bulletin.
"Looking ahead, acting in a firm and timely manner to ensure price stability in the medium term remains warranted," the central bank added.
The ECB said interest rates remain "on the accommodative side" even after its June 6th rate rise, which took the main refinancing rate to 4 per cent, and the medium-term inflation outlook remains subject to upside risks.
Inflation is likely to fall slightly in the months ahead but then rise again significantly towards the end of the year, it said.
"Risks to the medium outlook for price stability remain on the upside, relating in particular to the domestic side," it added.
Spare capacity in the area is narrowing while labour markets are tightening, suggesting that constraints may be emerging, in turn pushing wages higher.
The ECB called on wage restraint. "The Governing Council stresses the importance of avoiding wage developments that would eventually lead to inflationary pressures and harm the purchasing power of all euro area citizens."