The European Central Bank sent a clear signal today that euro zone interest rates may rise still further to contain inflation even though ECB watchers see an end to the tightening cycle as early as December.
Speaking to the European Parliament in Strasbourg, ECB President Jean-Claude Trichet - using typical central language - said that 'if our assumptions and baseline scenario are confirmed, it will remain warranted to further withdraw monetary accommodation'.
This means that if the euro zone economy continues to grow apace, the ECB may have to increase borrowing costs further to keep a lid on inflation.
The ECB has already raised its benchmark 'refi' refinancing rate by 1.25 percentage point since December to its current level of 3.25%. It is widely expected to raise it again by a further quarter-point to 3.5% in December.
'Inflation risks will remain on the upside', even if area-wide inflation slowed to a two and a half year low of 1.7% in September, Trichet insisted. The ECB defines price stability as a 12-month inflation rate of lose to but just below 2%.
At the same time, ECB executive board member Lorenzo Bini Smaghi warned that the world's central bank must not abandon the current cycle of monetary tightening prematurely.
'Stopping monetary tightening too soon might unleash further inflationary pressures as the economy starts weakening, thus reducing the room for cutting interest rates to accommodate the slowdown,' Bini Smaghi told a central bank conference in Tokyo.
Over the past two years, the US Federal Reserve, the ECB and the Bank of Japan have all started to raise their key interest rates again following a prolonged period of low rates.
ECB officials are convinced that the euro-area economy is likely to continue growing at around potential both this year and next year, despite a number of potential downside risks.
A number of ECB governing council members, including most recently Bundesbank President Axel Weber, have expressly refused to rule out further interest rate increases next year.
