The European Central Bank raised interest rates to a five-year high on Thursday and said it will keep a very close eye on price risks, leaving the door open for further tightening but giving no clear indication on when.
Eurozone interest rates at the new level of 3.50 percent are still low and monetary policy remains accommodative, the ECB said in its monetary policy statement, despite six rate rises over the last year which have added 1.5 percentage points to credit costs.
"Looking ahead, acting in a firm and timely manner to ensure price stability in the medium term is warranted," ECB President Jean-Claude Trichet told at a news conference after the quarter percentage point rate increase. "The Governing Council will monitor very closely all developments so that risks to price stability over the medium term do not materialise," he added.
This is the form of words which has been used in the past to put markets on notice for another rate rise in two months' time, but Trichet said it would be wrong to take the comment as a signal for a February increase.
"That would be a wrong interpretation," he said in response to reporters' questions. "What would be correct (is) as always we reserve the possibility to act at any time, as I said."
He failed to repeat another key sentence from past monetary policy statements: If the ECB's economic assumptions were confirmed, the central bank would continue to withdraw monetary accommodation from the economy.
The ECB has used the phrasing that it will monitor inflation risks "closely" or "very closely" each time it has raised rates in the past year. Then it has waited either three months, and more recently two months, before tightening again - an action that has been preceded by using the word "vigilance" over price risks.
Asked on what monitoring inflation risks "very closely" implied for future rate rises, Trichet refused to elaborate. "Our permanent posture is that we are constantly alert," he said. Eurozone rates are now at their highest level since November 2001. Earlier the Bank of England left British interest rates at 5.00 percent.
But analysts have been less certain about rate rises in 2007 given a recent surge in the euro, a rise in German value-added tax in January and a deepening slowdown in the United States. Releasing new ECB staff projections for growth and inflation, Trichet said the latest data indicated robust growth had continued in the final quarter of 2006, and the region was set for further expansion.
ECB staff revised up expectations for eurozone growth in 2006 and 2007, and predicted growth of about 2.3 percent in 2008. But Trichet said risks were on the downside, whereas in previous months he has said short-term risks are broadly balanced.
On inflation, ECB staff revised down forecasts for this year and next, and the midpoint of the range given for 2008 shows inflation is likely to fall below the ECB's 2 percent ceiling in 2008 for the first time since 1999.