The European Central Bank will do everything it can to keep inflation under control, top ECB policymakers said today.
ECB President Jean-Claude Trichet said although the ECB was not set on a path of monthly rate rises, inflation was running above target and the ECB would not hesitate to act to counter price risks.
"Unfortunately, due to high oil prices and a certain number of other phenomena, we have have had inflation for a little while, we have inflation that is above 2 per cent.
"We must do everything we can do to counter the risks of inflation," he said. But Mr Trichet gave no clear indication of when the next interest rate increase might come.
"We don't decide a priori, ex ante, monthly increases in interest rates. But on the other hand, we will do everything necessary to guarantee price stability," Mr Trichet told French television LCI.
Market expectations for rates to rise past the 2.5 per cent level set earlier this month were also boosted by comments from ECB chief economist Otmar Issing, who echoed Mr Trichet in stressing the central bank's determination to fight inflation.
The hawkish remarks over inflationary risks lifted the euro, which rose about a quarter of a cent against the US dollar to $1.2187 although it remained below its high for the day.
Currency and bond traders expect the ECB to raise rates two or three more times this year, possibly as early as May, and believe the US Federal Reserve may be nearing the end of its tightening cycle, making euro-zone assets more attractive.
ECB staff raised forecasts for both economic growth and inflation in March.
February headline inflation was 2.3 per cent and the forecasts show it is expected to exceed the ECB's threshold in both 2006 and 2007. Mr Issing said the ECB's assessment of inflation had not changed and excess liquidity in the 12-nation region could not be ignored.
"In the last quarter (money supply) growth has moderated but we can't forget what's already happened. A large liquidity build-up has developed and we can't ignore it," he was quoted as saying.
The ECB has been concerned that fast growth in the related measure of private lending, especially for home loans, may inflate property prices and Mr Issing said real estate trends needed further study.
"In some markets the danger is evident," Mr Issing said.
In a clear reference to the Irish market, Mr Issing said.
"In some countries we have strong price rises. Here we have to find out what is due to growing population, the need to catch up and the boost from an unusually low level of interest rates."
Trichet said the bank's aim to guarantee price stability allowed market interest rates to incorporate weak inflation expectations over the medium and long term. "This gives us very favourable financial conditions," he said.