The European Central Bank is watching prices with concern and would not hesitate to raise interest rates if higher oil prices were to cause inflationary problems, ECB chief economist Otmar Issing has said.

"We're observing with concern the development of prices," he told Die Welt newspaper in an interview to be published today.

His comments are the most aggressive warning yet from an ECB policymaker that the central bank is on high alert for inflation.

Mr Issing said, however, that oil prices would not result in a long-term rise in inflation, but he added the central bank was prepared if this became the case.

"Should such a development occur, we would forcefully counteract this with higher interest rates," Mr Issing said.

ECB President Jean-Claude Trichet also has turned slightly more hawkish this month, but he has not been so blunt, while other ECB policymakers have sounded more balanced.

Mr Issing, long seen as an inflationary hawk on the ECB's policy-setting council, said higher oil prices were restraining the economy, but said the effects should not be overestimated.

"Without a doubt, high oil prices act as a drag on the economy, but one should also not overestimate their current influence," he said.

Oil prices may have reached record nominal highs but adjusted for today's prices the impact is not as severe as in previous periods of oil price gains, he said.

The euro-zone economy is heading towards two per cent growth this year and the ECB expects the upswing to accelerate a little next year. Inflation has been running above 2 per cent in recent months, but the ECB expects it to fall below that ceiling in 2005.

Mr Issing left little doubt that preventing higher oil prices from feeding into wages and prices, known as second-round inflationary effects, would be his first priority. "We contribute to growth by pursuing our goal of price stability," he said, when Die Welt asked whether he would raise interest rates even if it endangered growth.

Mr Issing sounded confident that a recovery was in place.

"I do not see that we have already reached the end of growth," he said, adding there was a time lag between an economic upswing and improvements in the labour market.

The ECB on September 2nd left interest rates steady at its record low of 2 per cent but warned of upside risks to the outlook, causing financial markets to prepare for an interest rate hike, possibly by year-end.