Further increases in euro zone interest rates this year are warranted, European Central Bank Vice President Lucas Papademos said today.
Mr Papademos, speaking at the European Parliament in Brussels, said there was a risk of higher inflation in the euro zone, and that the central bank would keep a very close watch on economic developments.
"In view of the several upside risks to price stability that have been identified ... further increases in interest rates in the course of the year are warranted in order to ensure that price stability will be preserved over the medium term," he told legislators when he presented the ECB's 2005 annual report.
The ECB ended more than two years of record low euro-zone interest rates in December 2005, and raised rates again to 2.5 per cent in March.
Financial markets expect a further rate rise in June, and for rates to be at 3 per cent at the end of the third quarter.
Economic data have vindicated the central bank's decision to raise rates in March, and the economy looked set to strengthen further through the rest of the year, the ECB vice president said.
"All the data that has become available has confirmed that the growth outlook in the euro area is improving. We see from indicators, hard data as well as survey data, that the expected recovery of economic activity will take place," he said.
The euro zone economy is steadily strengthening and the ECB expects GDP growth around 2.1 per cent this year, up from a lacklustre 1.4 per cent in 2005.
Inflationary risks, however, are rising due to record-high oil prices and a long period of super-cheap rates, which has driven rapid growth in money and credit.