European Central Bank policymakers said they were still worried about inflation despite last week's interest rate rise, and insisted they were committed to keeping prices under control. Mario Draghi, who heads the Bank of Italy, said the ECB's first interest rate rise in over a year last week was having some impact in calming financial markets' inflation fears.
But ECB President Jean-Claude Trichet told the European Parliament inflation at 4 percent was "worrying", and there were legitimate concerns that it might not ease as the ECB hoped. "Risks to price stability over the medium term remain clearly on the upside ... and have intensified in recent months," he told legislators in Strasbourg, eastern France.
"The Governing Council is strongly concerned that price and wage-setting behaviour could add to inflationary pressures through broadly-based second-round effects. First signs are already emerging in some regions of the euro area," he said.
ECB Executive Board member Jose Manuel Gonzalez-Paramo, speaking in Spain where inflation hit 5.1 percent in June and wages are often linked to inflation, was even more direct.
"The European Central Bank Governing Council has the clear and firm intent to do at every moment what is needed to comply with its chief mandate - secure medium-term inflation and inflation expectations," Gonzalez-Paramo said during a speech on monetary policy and liquidity management. "There are very clear upside inflation risks," he said. "Inflation has become the main worry of our 320 million citizens."
Draghi said markets had appreciated the ECB's decision to raise rates to a seven-year high of 4.25 percent last week. "In the days following the rate increase, the upward tendency of inflation expectations in the financial markets has halted; they seem to have started to reduce," he told Italy's ABI banking association.
Trichet said after the rate move that the ECB did not have a bias on future interest rate decisions, an outlook markets took as a sign they had overestimated chances of a series of hikes. But Trichet's new remarks were viewed as more suggestive of a future rate rise, and euro zone government bond prices fell.
"When he mentioned the second-round (inflation) effects, people thought that maybe it would not be a 'once and done' rate stance for the ECB," said a trader based in London. A Reuters poll after last Thursday's rate meeting showed economists had scaled back expectations for the ECB to raise rates to 4.5 percent.
In a newspaper interview published on Monday, ECB Executive Board Member Gertrude Tumpel-Gugerell said the ECB's Governing Council shared Trichet's neutral stance on rates, which would indicate it has no desire to change monetary policy soon.
But Gonzalez-Paramo declined to comment on whether he had the same view, instead repeating that the bank hiked rates on July 3 in order to comply with its anti-inflation mandate.
"We took this decision to act preventatively to avoid the appearance of so-called second-round effects and to counteract the growing upside risks to price stability," he said. Both Trichet and Gonzalez-Paramo said the ECB's rate-setting Governing Council would continue to monitor data very closely. Asked if markets were correctly interpreting the ECB's message on interest rates, Gonzalez-Paramo said investors had to draw their own conclusions.