European Central Bank (ECB) president Jean Claude Trichet yesterday signalled that interest rates will rise by one quarter of a percentage point next June. He also did not rule out the possibility of a further rise later on this year, but said this would be clarified next month.
Mr Trichet, who was addressing a press conference in Dublin yesterday, also urged governments of euro-zone member states to ensure their fiscal policies were consistent with low inflation.
After its meeting in Dublin Castle the ECB governing council yesterday decided to leave its main refinancing rate unchanged at level of 3.75 per cent. The rate was increased last March.
However, in what is widely regarded as a clear signal of an imminent rate rise, Mr Trichet said the council was preparing to act to curb future inflationary pressure.
The ECB's favoured measure of inflation, the Harmonised Index of Consumer Prices (HICP) grew annually by 1.8 per cent in April. This was down from 1.9 per cent in March, but Mr Trichet hinted that action would be needed soon to prevent inflation rising back to 2 per cent.
"Strong vigilance is of the essence in order to ensure that risks to price stability over the medium term do not materialise," he said.
Irish Intercontinental Bank (IIB) economist Austin Hughes said Mr Trichet's remarks clearly pointed to a June rate rise.
"Not only did the now standard code words of 'strong vigilance' feature prominently in the opening press statement, Mr Trichet also repeatedly used the phrase during the press conference," Mr Hughes said yesterday.
Although inflation is set to moderate in the months ahead, Mr Trichet pointed to resumed oil price increases and increases in "administered prices" as reasons why this may only be a temporary development.
"The outlook for price developments remains subject to upside risks," he said.
While praising social partners for contributing to employment growth by past wage moderation, he warned that an upturn in wage growth would fuel inflation.
"More fundamentally, stronger than current expected wage developments could pose significant upward risks to price stability," he said.
Asked whether the ECB would contemplate further increases beyond June, Mr Trichet said that he would provide more information in a month's time.
"I give you a rendezvous in June. We will have new information, new data and it will be the appropriate moment to say what we will do after June."
Refusing to comment directly on the latest inflation figures for Ireland, Mr Trichet - referring to countries as "regions" - said that membership of the euro zone obliged participants to use fiscal policies to combat inflation.
"All other instruments that are in the hands of the regions have to be optimised."
The Central Statistics Office (CSO) yesterday confirmed Ireland's rate of HICP inflation was 2.9 per cent in April, over 1 per cent higher than the euro-zone average.
