After the European Central Bank left interest rates on hold today, President Jean-Claude paved the way for a rate hike next month when he said the bank would exercise "strong vigilance" on possible euro-zone inflation risks.
The use of the term "strong vigilance" is widely seen as Trichet's code-word for preparing the markets for a rate hike the following month.
The ECB left its base rate unchanged at 3.50% at its regular monthly rate-setting meeting today, two months after raising it by a quarter of a percentage point.
'We will be strongly vigilant in order to ensure that risks to price stability over the medium term do not materialise,' Trichet told the news conference after today's policy-setting meeting.
'This will support the solid anchoring of medium to longer-term inflation expectations in the euro area at levels consistent with price stability. Therefore, looking ahead, acting in a firm and timely manner to ensure price stability in the medium term remains warranted,' he said.
Speaking on RTE radio Jim Power, economist with Friends First, said that the ECB is intent on ensuring inflation does not get out of control and it still believes rates are low and accomodative for further rises.
He is forecasting two, or even three, more rate rises this year with interest rates reaching 4% or 4.25%.
He said that for every quarter of a percentage rise this means an extra €35 per month for Irish borrowers on the average mortgage of €220,00.
The bank also held its two other key rates -- the deposit rate and the marginal lending rate -- unchanged at 2.5% and 4.5% respectively.
The ECB has raised eurozone borrowing costs six times in the past 14 months, and every time the term "strong vigilance" has been used by the bank to flag the rise the month before.
Many analysts expect the rate to hit 3.75% in early 2007.
This is because the ECB is worried about the prospect of rising prices as the eurozone economy expands at its fastest rate in six years and borrowing levels rise.
