The European Central Bank's Governing Council said it would be vigilant in the face of inflation threats after it released a survey today showing an upward move in inflation expectations in the euro zone.
Consumer prices are seen rising 2 per cent in 2007, according to the latest survey of professional forecasters, up from 1.8 per cent three months earlier. Expectations for 2006 were unchanged at 2 per cent, but the balance of inflation risks for both years shifted towards a higher number.
The survey, published in the ECB's February bulletin, backs up the bank's concern about increasing inflation risks even after it raised rates for the first time in five years in December.
The central bank is widely expected to move rates up again in March, by another quarter-point to 2.5 per cent, and ECB chief economist Otmar Issing stressed in a newspaper interview published on Thursday that the ECB was ready to move.
"Firstly, the ECB has no fixed plan for a series of interest rate rises," he told Germany's Frankfurter Allgemeine Zeitung.
According to the survey, the probability that 2006 inflation will lie in 2 -2.4 per cent range rose to 49 per cent, from 44 per cent earlier, which would put it firmly above the ECB's 2 per cent price stability ceiling.
ECB staff have forecast average annual inflation of about 2.1 per cent in 2006, and about 2 per cent in 2007.
The ECB said forecasters cited oil as a risk to the price outlook, and the majority also pointed to planned increases in German value-added tax to justify higher expectations for 2007.
The ECB said in the bulletin there was a risk its inflation forecasts might be exceeded if there are further oil price rises, rising indirect taxes and government-set prices for goods, and second-round effects. Strong money and credit growth, combined with ample liquidity, was another risk, the ECB said.
Growth might undershoot due to high oil prices and imbalances in global trade and investment patterns, the ECB added.