European Central Bank (ECB) policymakers showed no let-up in their war against inflationary pressures today, warning of rising wages and oil prices in a solidly expanding euro zone economy.
ECB Vice President Lucas Papademos said the central bank would remain on high alert in the months ahead and stand ready to stamp out any sign that inflation might worsen.
"Monetary policy has been contributing decisively to fostering economic growth by having established an environment of stability and by ensuring that medium- to long-term inflation expectations remain solidly anchored to levels consistent with price stability," he told a Vienna conference hosted by the Austrian central bank."
"It will continue to do so," he said. "The ECB's monetary policy council will continue to be strongly vigilant and ready to act in an effective, firm and timely manner to ensure that price stability is preserved over the medium- and longer-term," he added.
By using the phrase "strongly vigilant" at its last policy meeting, the ECB has already signalled its plans to raise its benchmark refinancing rate for an eighth time by 25 basis points to 4 percent on June 6.
The question bedevilling ECB watchers is how many more rate increases are in store after that. European government debt traders increasingly are pricing in the chance that the ECB rate will reach beyond 4.25 percent by next March.
This view was reinforced by Austrian central bank chief Klaus Liebscher. He said he belonged to the group of ECB policymakers who believed there were upward price risks and that this was no time to rest easy.
"Monetary policy has to act pre-emptively. If we take the developments over the recent few days with oil prices we have seen going back to $70 (€52.08) per barrel, so I think complacency is not there," he told reporters at the Vienna conference.
"Among other factors, there are fears of new indirect taxes or administrative prices which we are not knowing until now... So all in all, I am in the camp of those who are seeing upward pressures."
Speaking in Madrid, ECB President Jean-Claude Trichet for the second time in a week defended the value of examining rapid growth in money supply and credit to identify potential inflationary pressures when setting interest rates.
Joining Austria's Liebscher in the price-risks camp was Germany's Bundesbank. In its monthly bulletin, the Bundesbank said it saw inflationary dangers worsening, based on projections from monetary aggregates and by looking it economic conditions.
"Especially on the wage side, inflationary pressure could arise from the swift gains in employment and the strengthening of company profit margins," the Bundesbank report said.
"Capacity bottlenecks looming in some sectors point in the same direction," it said, adding that the current crop of strong economic data required "particular monetary policy vigilance."
The euro was little affected by the latest ECB policymakers comments. Prices of European government debt, which fell last week, continued to lose ground, though largely on money flowing into equities. Over the weekend, ECB Executive Board member Jose Manuel Gonzalez Paramo speaking in Brazil also repeated his message of a few days earlier that strong vigilance was needed to make sure that price risks did not materialise.
So far, consumer inflation in the past eight months has held below the ECB's two per cent ceiling despite volatile oil prices and an economy growing at an above-trend rate of 2.8 per cent last year and 3.1 per cent year on year in the first quarter.