The European Central Bank will monitor price risks very closely, ECB President Jean-Claude Trichet said today, using language suggesting interest rates will stay on hold at least until March.
His comments were made after the the ECB left interest rates on hold this month, as expected.
The base rate, at which the bank lends money to financial institutions, remains at 3.5%, and the decision came after the Bank of England today unveiled an unexpected rise in UK rates to 5.25%.
Mr Trichet rold reporters financial markets were not wrong in expecting a further rise in euro zone interest rates at the end of the first quarter.
'Very close monitoring of all developments is of the essence so that risks to price stability over the medium term do not materialise,' Trichet said at the montly press conference after the ECB decision.
'This will permit medium to longer-term inflation expectations in the euro area to remain solidly anchored at levels consistent with price stability', he said.
Trichet did not mention ECB vigilance on price risks, as he has in the past. The use of that phrase usually signalled an interest rate increase the following month.
Throughout 2006, the phrase 'monitor very closely' indicated that the ECB planned to raise rates two months later.
IIB Bank economist Austin Hughes said although rates are unlikely to go up in February, the ECB is likely to raise rates at least one more time in the first six months of 2007 - and a second increase can't be ruled out.
He said the ECB is more confident about the persistence of strong activity in the eurozone, and for the central bank a major problem is that fast economic growth in Europe has traditionally spilled over into higher inflation.
Mr Hughes said a March rate rise cannot be ruled out, and Mr Trichet has indicated inflation risks still lie to the upside, and the ECB still feels interest rates are at low levels and policy is accommodative.
Mr Hughes that if inflation rebounds and borrowing remains strong, ECB rates will hit 4% - but IIB bank expects growth and inflation to ease as 2007 progresses so a 3.75% maximum next year is more likely.
