The European Central Bank will exercise "strong vigilance" over inflation risks, ECB President Jean-Claude Trichet said today after keeping interest rates at 3 per cent.
"Strong vigilance remains of the essence so as to ensure upside risks to price stability are contained," Mr Trichet told a news conference after the ECB's staff raised their projections for euro zone growth and inflation this year and next.
His comments pave the way for further rate hikes. Mr Trichet used the word "vigilance" in November, February, May and July - the months immediately preceding ECB rate increases.
Financial markets were listening closely for the wording to confirm their expectations that the ECB will deliver its fifth, quarter-point rate rise in this cycle in October.
The euro gained slightly versus the US dollar after Mr Trichet's comments, while prices for euro zone government bond and interest rate futures fell.
Recent data have shown softening inflationary pressures as oil prices have started to retreat, mixed retail sales, weakening sentiment surveys and a slowdown in the US economy.
Analysts said this has given the ECB some breathing room before delivering its next rate hike. Mr Trichet said the euro zone economy was on track to grow around its potential level, though longer-term risks to growth had increased.
"Over the longer term . . . downside risks relate mainly to potential further oil price rises, global imbalances and protectionist pressures, especially after the suspension of the Doha round of trade talks," he said.