European Central Bank governors must verify interest rate levels are appropriate given 'unacceptable' inflation, an ECB director said, providing further evidence of a likely rate rise next month.
'At an annualised 3.7%, euro zone inflation reached an unacceptable level in May,' ECB chief economist Juergen Stark said last night.
'Our concern is justified,' Stark added, while noting that the main cause of inflation was the rise of oil and food prices which should taper off at some point.
But since the increases have continued longer than expected, risks to the euro zone economy including demands for higher wages have forced the ECB to signal a likely interest rate increase despite weakening economic growth.
ECB president Jean-Claude Trichet said two weeks ago that a small increase was possible when the bank's governing council meets on July 3.
His comments pushed up the value of the euro against the dollar, and fueled a surge in oil prices because markets concluded the bank would begin a cycle of rate increases. The ECB has worked to dampen such expectations since.
The idea of higher interest rates was bad news for some euro zone members such as Ireland and Spain, which are suffering from serious housing market slumps.
Financial markets and economists now expect the ECB to raise its key lending rate by a quarter percentage point to 4.25% next month.
