The European Central Bank (ECB) has signalled that another rise in interest rates is imminent, to counter the lingering effect of last year's oil price rises, as well as increases in indirect taxes.

The ECB's governing council decided to keep interest rates unchanged after meeting yesterday. But in a press statement after the meeting, ECB president Jean-Claude Trichet said the risks of higher inflation later this year were strong. "They continue to include a stronger pass-through of past oil price rises into consumer prices than currently anticipated, and additional increases in administered prices and indirect taxes," he said.

ECB economists are concerned at accelerating wage growth as well as the fact that capacity utilisation - a measure of how much of an economy's productive capacity is being used - has reached a seven-year high, a sign that price pressures are likely to grow. Mr Trichet rejected the suggestion that recent falls in oil prices would lower inflation. "In assessing price trends it is particularly important to look through any short-term volatility. On the basis of today's assessment, after a possible fall over the spring and summer, inflation rates are likely to increase again later in the year," he said.

Strong growth in money supply and lending were a sign that monetary policy was "still accommodative", he said.

In a reference suggesting that a quarter-point increase in the bank's main refinancing rate will occur next March, he twice mentioned the need for the ECB to be "be strongly vigilant" and said it needed to act in a "firm and timely manner" if it was to successfully pre-empt inflation.

A quarter-point increase would increase the ECB's main refinancing rate to 3.75 per cent.

While agreeing that such an increase would occur, AIB chief economist John Beggs said a further rise to 4 per cent would be needed to bring real interest rates - interest rates less the rate of inflation - closer towards levels that the ECB would regard as sustainable in the long-term. "This would represent a real rate of about 2 per cent, which is probably close to a neutral stance and broadly consistent with an economy growing close to potential," Mr Beggs said yesterday.

Mr Trichet yesterday predicted the euro zone economy would grow at rates "close to potential" for the rest of the year.