European Central Bank (ECB) President Jean-Claude Trichet said today he saw euro zone price stability in the medium term but warned about longer-term inflation expectations.
"Measures of long-term inflation expectation derived from financial market indicators remain relatively high. While such measures always need to be interpreted with caution, their development calls for particular vigilance," he told an international financial forum in Paris.
Regarding the ECB's decision to leave interest rates unchanged at an historic low of 2 per cent at its last Governing Council meeting, Mr Trichet said: "We remain vigilant as regards all developments which could affect risks to price stability."
The day before the ECB decided to keep rates stable, the US Federal Reserve raised its rates by a quarter percentage point. "They had good reasons to increase rates and we had good reasons to keep rates unchanged," said Mr Trichet.
Mr Trichet said if oil prices remained high, inflation would probably remain above 2 per cent for longer than was expected this year and possibly in the first half of next year.
"Looking beyond the short term, however, the main scenario for medium term inflation remains consistent with price stability," he said.