The European Central Bank stands ready to raise interest rates again when needed to address inflationary pressures in the euro zone, ECB policymakers said today.
Monetary indicators point to upside price risks, the ECB said in its June bulletin.
A new model based on money and credit growth showed inflation remaining firmly above 2 per cent through early 2009 and possibly rising as high as 3.5 per cent.
The bulletin repeated the warning that the ECB is watching inflationary developments closely, a message also delivered by ECB Governing Council member Erkki Liikanen in Helsinki.
"Euro area inflation has remained above 2 per cent, and it is not expected to slow down significantly in the immediate future. Moreover, the risks in the inflation outlook are weighted to the upside," he said in presenting the Finnish economic outlook.
The ECB is committed to keeping inflationary expectations well anchored, Liikanen said as Eurostat reported that consumer prices in the 12-nation region rose at a 2.5 per cent year-on-year in May, its strongest gain since 2.6 per cent last September.
That puts inflation well above the ECB's 2 per cent ceiling, and Mr Liikanen said that the ECB would not hesitate to tighten rates again to address the problem. "The Governing Council will act when needed," he said.
The central bank has already tightened credit by 0.75 per centage points to 2.75 per cent over the past six months and financial markets expect another rate rise in late August.
ECB President Jean-Claude Trichet said last week that the central bank would progressively withdraw monetary accommodation but he also gave no indication on the timing of future rate increases.
Mr Liikanen gave no indication that the stock market upheaval of the past month would cause the ECB to pause in its rate tightening cycle. "The recent stock market turbulence is a reminder of the uncertainty surrounding the economic outlook. There are, however, increased risks that inflation could begin to accelerate," he said.