The European Central Bank (ECB) is keeping a close eye on inflation, and monetary policy remains accommodative, the European Central Bank said in the editorial of its monthly bulletin today.
The ECB will monitor price risks closely to evaluate risks to price stability, it said, repeating the warnings made in its policy statement last week after raising rates by 0.25 percentage points for the second time in three months.
"Interest rates across the entire maturity spectrum still remain at very low levels in both nominal and real terms, and our monetary policy remains accommodative," the ECB said.
"The Governing Council will continue to monitor closely all developments with respect to risks to price stability."
Financial markets expect the central bank to lift its key refinancing rate from 2.5 per cent again by the middle of this year, and continue tightening credit conditions through 2006.
ECB policymakers this week have driven home the message that they view monetary conditions as extremely loose in the 12-nation euro zone. That, combined with a brightening economy, suggests their readiness to keep raising ECB rates.
In the editorial, the ECB repeated that economic prospects are better. "The conditions remain in place for ongoing economic expansion in the euro area," its said.
However downside growth risks persist due to oil prices and global imbalances. On the price front, inflation is seen remaining above the ECB's 2 per cent ceiling in the coming months, and government fees and taxes are expected to have significant upward impact in 2006 and 2007.
"Risks to the outlook for price developments remain on the upside," it said, also citing oil cost pass-through and wage demands as risks.
Strong growth in money and credit in the euro zone against a backdrop of ample liquidity also add to price risks, it said.