The European Central Bank yesterday gave its clearest signal yet that interest rates in the 11-nation euro zone may have to rise to safeguard the bank's objective of price stability in the medium term. Mr Christian Noyer, ECB vice-president, said the risk of inflation rising was now stronger than the risk of its decelerating.

The bank would "probably" have to take "some sort of action not to upset" its medium-term goal of holding consumer price increases below 2 per cent per year, he told the European Parliament's committee on economic and monetary affairs.

Mr Noyer was speaking as the ECB released figures showing that money supply growth in the euro zone slowed slightly in August but still remained above the bank's preferred rate.

Pointing to a private sector credit growth rate of about 10 per cent, he said: "Monetary and credit developments signal that, at present, the liquidity situation in the euro area is rather generous, signalling a possible risk to price stability in the medium term, which the Eurosystem [the ECB] needs to take seriously."

However, Mr Noyer said that "over a horizon of 12 months or so", the ECB expected consumer price rises to stay below the 2 per cent ceiling. He reassured MEPs that the bank would be sensitive to any short-lived surge in inflation triggered by an economic shock. A one-month rise in annual inflation above 2 per cent would not be inconsistent with medium-term price stability.

But Mr Noyer said the ECB did not expect inflation in the next 12 months to rise above its target ceiling of 2 per cent a year. Higher oil prices and the euro's weakness, which makes imports more expensive, would be countered by cheaper goods and services resulting from deregulation and more intense competition, he said.

The annual growth rate of eurozone M3 money supply slowed to 5.7 per cent last month from a revised 5.8 per cent in July. The ECB had previously estimated the July rate at 5.6 per cent.

Measured by the ECB's three-month moving average, M3 grew by 5.6 per cent from June to August compared with a revised 5.5 per cent from May to July. The ECB has set a loose target of 4.5 per cent for annual M3 growth this year.