The European Central Bank raised its main interest rate by a quarter of a point to a seven-year high point of 4.25% today to choke record inflation as economies slow down.
ECB head Jean-Claude Trichet signalled that this was not necessarily the last increase, saying that although today's move - agreed unanimously by the bank's board - would help to keep a lid on inflation, the bank remained watchful.
He later told RTE radio the bank had 'no bias' either way on rates in the coming months.
'On the basis of our current assessment, the monetary policy stance following today's decision will contribute to achieving our objective' of moderating inflation', Trichet told a news conference.
'We will continue to monitor very closely all developments over the period ahead,' he added.
'Risks to price stability at the policy-relevant medium-term horizon remain clearly on the upside and have increased further over the past few months,' Trichet said.
These risks include the possibility of further increases in energy and food prices, and there is also 'very strong concern' that price and wage-setting behaviour could add to inflationary pressures via broadly based second-round effects, he added.
'Against this background, it is imperative to ensure that medium to longer-term inflation expectations remain firmly anchored at levels in line with price stability,' he said.
Euro zone inflation hit a record 4% in June on the back of strong prices rises for food and energy, and there is growing evidence, particularly in Spain and Ireland, that the euro zone is experiencing a marked slowdown.
While most analysts believe the ECB would now keep its main refinancing rate stable for the rest of 2008, financial markets saw it heading higher.
With economic indicators showing the 15-nation economy slowing down quickly, dogged inflation - some see it reaching 4.2-4.3% in August or September - has put the ECB in a bind.
A purchasing manager's index indicated this week that business activity slowed slightly faster in June than first estimated, pointing to a contraction for the first time for three years.
The ECB also today increased its other two key rates - the deposit rate and the marginal lending rate - by 0.25 percentage points to 3.25% and 5.25% respectively.
The last time the main rate was changed to 4.25% was on August 30 2001 and it was a cut from 4.5%. At the time, the ECB had resisted pressure to follow multiple rate cuts by the Fed even though euro zone economies had been struggling for months.
Less than two weeks later terrorist attacks struck the US, and the ECB cut its rates again by a half percentage point in an exceptional mid-month move on September 17, six days after the attacks.
