The European Central Bank may hike interest rates next month, far earlier than markets expected.
But the bank's president Jean-Claude Trichet indicated that any rise would not signal the start of a series of increases.
Mr Trichet dismissed the idea that a rate rise in April could be bigger than 0.25 points, saying that such a scenario was 'not the appropriate interpretation'. He said an increase next month was 'possible, but not certain'.
He was speaking at a news conference after the central bank left rates at a record low 1%. Asked whether a potential rate rise in April would signal the start of a round of hikes, he added: 'It is certainly not the sense of the start of a series of rate hike increases.'
Trichet said the ECB would exercise 'strong vigilance' over rising inflation, deploying a phrase that in the past signalled a rate rise was only a month away.
The ECB used the phrase repeatedly during its 2005-2007 rate hike cycle, typically one month before it raised rates, although there were exceptions to that rule. In his opening statement, he also pointedly did not say that rates were at an appropriate level.
Euro zone inflation accelerated to 2.4% last month, moving further above the ECB's target of just below 2%.
In a fresh set of forecasts, ECB staff forecast euro zone inflation would overshoot the central bank's target this year, but to fall back to below the 2% upper limit in 2012.
Mr Trichet said staff expected inflation to be 2% to 2.6% in 2011 and between 1% and 2.4% in 2012. The figures were higher than in the last set of forecasts, but he added that the latest prediction did not take account of the most recent increases in oil prices. He said there was a risk that inflation could be higher, mainly because of higher commodity prices.
The ECB chief also said the central bank would carry on providing unlimited funding for banks at its three-month operations for the next three months and would keep full allotment at its weekly and one-month operations, until at least July 12.
The ECB faces accelerating inflation but its readiness to restart its 'exit strategy' from bank support measures may be limited by doubts about whether EU leaders will agree later this month to bolster Europe's rescue fund.
Asked about Ireland, the ECB chief repeated that the EU/IMF plan should be applied. He would not comment on calls for Ireland's interest rates to be lowered, and that this was up to European governments.
IMF interest rates could be lower
The IMF has said that the interest rate that Ireland will pay as part of the IMF/EU deal to lend €85 billion may be reduced.
Technical changes in the composition of the IMF's quotas may result in a fall in the interest rate that Ireland has to pay on much of its IMF debt.
Some of Ireland's debt to the IMF will now be charged at 3.04%. Other portions will cost 3.85%.
The IMF says that the reduction will be because of internal changes in its organisation and not a change in policy towards Ireland. Further changes due to the IMF next year will also have a positive effect in bringing down the cost of IMF loans to Ireland further.
Meanwhile, talks between the International Monetary Fund and the new Irish government on the country's rescue deal could start at the end of March or early April, an IMF spokeswoman said today.
Speaking in Washington, IMF spokesman Caroline Atkinson said the overall goals of the loan programme to restore growth to Ireland's economy and address issues in the banking sector would stay the same.
But she said the IMF was open to discussions on the best way to achieve those goals.
'It will be a fully fledged review mission at that time,' Atkinson told a regular briefing for reporters.
