The European Central Bank reaffirmed today its intention to continue raising rates in the coming months if the ongoing economic upturn rendered such a move necessary.
'If the governing council's assumptions and baseline scenario are confirmed, it will remain warranted to further withdraw monetary accommodation,' the ECB wrote in its October monthly report, published today.
The wording of the report matched exactly the comments made by ECB President Jean-Claude Trichet at a press conference in Paris last week where bank raised its key interest rates to a five-year high of 3.25%.
But the ECB appears to believe that the current cycle of monetary tightening could be drawing to an end. In previous months the ECB had spoken of the need for a 'progressive' withdrawal of monetary accommodation, but Trichet dropped the word 'progressive' at the news conference last week.
The small but significant change in wording could signal that the bank is thinking in terms of only one more interest rate increase, possibly to 3.5% at the end of this year, to be followed by a sustained period of steady rates, ECB watchers believe.
In its October monthly bulletin, the ECB today insisted that monetary policy remained 'accommodative' after the latest rate increase. It said the governing council would continue to 'monitor very closely all developments so as to ensure price stability over the medium and longer term'.
Euro zone growth had become more broadly based, with more support from domestic demand, it said. After the strong figures recorded in the first half of the year, growth was likely to show some moderation but would remain robust in the third quarter, it added.
And while inflation slowed markedly in September as a result of the recent fall in oil prices, it was likely to increase again towards the end of the year and in early 2007, it said. Annual average inflation was still expected to be above 2% in both 2006 and 2007, and risks to the inflation outlook remained clearly on the upside, the ECB said.
