The European Central Bank is in a state of high alert over inflation and financial markets are correct in expecting an imminent move on interest rates, a top ECB official said in a newspaper interview in Vienna today.
The ECB's rate-setting governing council 'observed at its last meeting that the risks to price stability have increased still further in the medium term,' executive board member Gertrude Tumpel-Gugerell told the financial daily WirtschaftsBlatt.
'As a result, we're in a state of heightened vigilance. The financial markets and public have interpreted our signal correctly,' Tumpell-Gugerell said.
At the ECB's rate-setting meeting earlier this month, central bank president Jean-Claude Trichet hinted at a possible rise in borrowing costs as early as July to help put a lid on inflation, which soared to 3.6% in May.
While the bank had decided to leave its key rate unchanged at 4%this month, Trichet said the ECB was not ruling out a small tightening of monetary policy some time soon.
Tumpell-Gugerell saw the latest surge in inflation - fuelled by soaring food and energy prices - as a 'warning signal'.
'If these price increases lead to a hardening of longer-term inflation expectations, additional price and wage increases could trigger an upward spiral,' she warned.
Tumpell-Gugerell conceded that economic growth was likely to lose momentum. 'But we're expecting only a temporary dent,' she said.
