Jean-Claude Trichet, the European Central Bank president, yesterday fuelled expectations of a euro-zone rate rise next month. Such a move would affect mortgages as any rise is likely to be passed onto consumers by lenders.

Mr Trichet said "vigilance" was needed to contain inflation as the economic recovery gathered pace in Europe. Mr Trichet said the markets were "perfectly sensible" in pricing in further short-term increases in euro-zone interest rates.

In his latest testimony to the European Parliament, Mr Trichet said medium-term trends in the euro-zone economy remain strong in spite of disappointing recent data.

The euro zone's disappointing quarterly growth rate in the final quarter, 0.3 per cent, did not disprove a recovery in the 12 member area, Mr Trichet said.

"Although this is significantly lower than the 0.6 per cent recorded in the previous quarter, this figure however mainly reflects the significant volatility in real GDP growth rates on a quarter on quarter basis. Looking through the short-term volatility to medium-term trends, our assessment continues to reflect a progressive strengthening of economic activity".

He warned that inflationary pressure could resume early this year: "In the coming months, annual inflation rates may again be somewhat higher amid renewed increases in energy prices and some base effects, as Eurostat's flash estimate of 2.4 per cent for the harmonised EU rate of inflation in January 2006 would appear to confirm that. Looking further ahead, indirect effects of past oil price rises on other components of the price index may gradually materialise", Mr Trichet said.

He also warned that government administered prices would contribute to higher inflation in coming months.

In a reference to longer-term inflationary pressures, Mr Trichet indicated his concern at strong monetary growth in the euro zone. "Overall, strong monetary and credit growth in a context of already ample liquidity in the euro area points to risks to price stability over the medium to longer-term," he said.

In Frankfurt, the Bundesbank said Germany would return to growth in the first quarter of this year and predicted 1.5 per cent growth over the year as a whole. Data issued by the federal statistics office last week showed the German economy failed to grow between the third and fourth quarter of last year.

The ECB and German Bundesbank expect a better employment situation to raise consumer spending and economic activity.

In its latest monthly report, the Bundesbank says robust growth in Asia would also help to pull the euro zone's largest economy out of low growth. A clearer picture of the state of the German economy will emerge this week. Tomorrow sees the publication of final-quarter growth estimates, while on Thursday the German economic research institute, Ifo, will publish its latest index of business confidence.