European Central Bank President Jean-Claude Trichet said last week's interest-rate increase will help policy makers fight “worrying” inflation levels in the euro region.
"The monetary policy stance will contribute to achieving price stability over the medium term," Mr Trichet said in Strasbourg today, echoing comments he made on July 3 after the rate decision.
"We will continue to monitor all developments in the period ahead."
The ECB increased its benchmark rate by a quarter point to 4.25 per cent to get to grips with the fastest inflation in more than 16 years.
The Frankfurt-based central bank is weighing the risk that higher rates will exacerbate an economic slowdown against the danger that surging consumer prices will feed into wages and prices.
The "inflation rate is likely to remain well above the level consistent with price stability for some time, moderating only gradually in 2009," Mr Trichet said. "Risks to price stability remain clearly on the upside and have intensified over recent months."
Inflation in the 15 euro nations accelerated to 4 per cent in June, a level that Mr Trichet described today as "worrying" and that's twice the ECB's 2 per cent limit.
Higher rates may further squeeze the economy, which is already grappling with a stronger euro and waning global demand.
Oil prices have doubled over the past year and breached $145 a barrel for the first time last week, sapping the purchasing power of both consumers and companies.
At the same time, "growth in emerging countries should remain robust" and help European exports, Mr Trichet said. "On the domestic side, the economic fundamentals remain sound'' even as uncertainty surrounding the growth outlook remains "high." Growth in the first half o f the year is "likely to show volatility," he said.
Economic growth may weaken to 1.5 per cent next year from 1.8 per cent this year and 2.6 per cent in 2007, according to ECB staff projections.
Bloomberg