Jean-Claude Trichet, president of the European Central Bank (ECB), yesterday issued one of his strongest warnings yet that interest rates might have to rise to head off the inflationary consequences of higher oil prices.

In a significant toughening of the central bank's anti-inflation talk, Mr Trichet insisted that "strong vigilance" was required because of upward pressures on price stability. "Everybody knows that we could move rates at any time," he said.

Mr Trichet's comments - which pushed the euro more than 1 per cent higher against the dollar - followed the acceleration in euro-zone inflation to 2.5 per cent last month.

He feared that inflation could rise even higher and that the risks had increased of energy costs feeding through into other prices.

He was speaking after a meeting of the ECB's governing council in Athens that left the bank's main interest rates unchanged at 2 per cent for the 28th month running.

Although the current rate was "still appropriate" and he was not "pre-announcing" an increase in borrowing costs, Mr Trichet revealed that the council had discussed the "pros and cons" of a rate increase.

Dave Tilson, head of euro interest rate trading at Bank of Ireland Global Markets, said the tone of Mr Trichet's comments would leave commentators "contemplating a hike in interest rates early next year".

He said that, in the light of the ECB's attempts to improve communications with financial markets, the comments were an "attempt to prepare markets to expect a move away from its highly accommodative policy stance of the last two years sooner rather than later".

His comments rattled European stock markets, already unsettled by recent hawkish interest rate comments by US Federal Reserve officials.

The pan-European FTSE Eurofirst 300 index yesterday fell 1.3 per cent to 1,212.75, taking its decline over the past two days to 2.4 per cent - its worst two-day performance since mid-April of this year.

Economists said the chances of an interest rate increase this year had risen, but financial markets still doubted whether Mr Trichet's talk would result in action - especially while growth in the euro zone remained weak and inflation excluding energy might prove more benign than the ECB feared.

Inflation in the euro zone in August was 2.2 per cent. - (Financial Times Service)

The Bank of England left interest rates unchanged at 4.5 per cent yesterday, but analysts remain divided on when and in what direction the central bank's next move will be.

Financial markets did not react to the decision but futures are now pricing in a cut by March.