The European Central Bank is not talking about a series of interest rate hikes, ECB Executive Board member Juergen Stark was reported as saying today.
Mr Stark said that markets had understood the ECB's signal on June 5th about possibly raising borrowing costs next month from the current 4 per cent.
"However, we are not talking about a series of rate increases," Mr Stark said in an interview in Massachusetts conducted late last night.
His comments pushed down the euro and yields on interest-rate sensitive two-year government bonds as traders backed away from bets on aggressive ECB tightening.
Traders generally expect the ECB to raise rates by 25 basis points to 4.25 per cent in July after ECB President Jean-Claude Trichet said a July hike was possible, but not certain, as the ECB battles record-high inflation.
EONIA contracts were early today pricing in a second hike to 4.5 per cent by the end of the year, but chances of a third were seen diminishing even before Mr Stark's comments.
Mr Trichet said last Thursday that any July hike would be a similar size to previous tightenings.
Oil prices above $130 a barrel and rising food prices have driven euro-zone inflation to 3.6 per cent in May, well above the ECB's 2 per cent ceiling.
ECB policymakers are concerned that this will raise inflation expectations, a point stressed by Germany's Axel Weber and Cyprus's Athanasios Orphanides in overnight comments.
Mr Stark also said the ECB would do everything needed to anchor inflation expectations.