The European Central Bank stands ready to raise interest rates to prevent inflationary pressures building whenever that proves necessary, ECB President Jean-Claude Trichet said today.
"Everybody knows that when action would be necessary, we would embark on action," Mr Trichet told a banking conference.
He said inflation expectations have remained remarkably stable, and gave no indication the central bank saw a threat to its price stability goal at this moment.
But Mr Trichet made clear that credibility on price stability is of the essence, and the central stands ready to defend that as needed if inflationary expectations start rising. "We express our vigilance," he said.
The ECB increasingly has been laying the groundwork for an interest rate hike, warning of potential inflationary dangers from real estate prices, high credit growth and too much cheap money sloshing around the euro zone.
But weak growth has stayed its hand.
The ECB last week held its benchmark refinancing rate steady at 2 per cent for the 21st month in a row. Economists and traders in financial markets expect no rate increase until later this year, once growth has become more solid.
Meanwhile, the ECB is stressing its vigilance on inflationary risks, a message designed to assure citizens and markets that it will not allow price pressures to get out of hand while it keeps rates low enough to support recovery.
"The anchoring of medium, long and very long-term inflation expectations relies very much ... on our own credibility, our credibility over a long period of time price stability. If we were not vigilant we would lose immediately credibility," Mr Trichet told bankers and financial experts at the conference on the European financial structures after EU enlargement.