FRANKFURT (Thomson Financial) - The European Central Bank said it is monitoring inflation risks closely and remains ready to raise interest rates further if necessary.
"The governing council will continue to monitor closely all developments to ensure that risks to price stability over the medium term do not materialise," the ECB said in its July monthly bulletin.
"Looking ahead, acting in a firm and timely manner to ensure price stability in the medium term remains warranted," the central bank added.
The ECB said interest rates remain "on the accommodative side" even after its June 6 rate hike, which took the main refinancing rate to 4.00 pct, and the medium-term inflation outlook remains subject to upside risks.
While inflation is likely to dip in the months ahead, it is also seen rising sharply thereafter.
"Overall, on the basis of current oil prices and oil price futures, annual inflation rates are likely to fall only slightly in the months ahead, before rising again significantly towards the end of the year," said the ECB.
Spare capacity in the area is narrowing while labour markets are tightening, suggesting that constraints may be emerging, in turn pushing wages higher.
The ECB called for wage restraint: "The Governing Council stresses the importance of avoiding wage developments that would eventually lead to inflationary pressures and harm the purchasing power of all euro area citizens."
It also warned of rising prices in segments of the market where competition is low.
Private consumption, meanwhile, is seen staying favourable.
And the strength of money and credit growth point to clear inflation risks in the medium to longer term, it said.
Meanwhile, the outlook for the euro zone economy remains favourable, with growth seen at a "sustained rate." However, the central bank warned of a possible rise in protectionist pressures alongside higher oil prices as factors which may weigh on growth.
Turning to fiscal policy, the ECB warned against fiscal indiscipline.
The bulletin editorial closely matches ECB president Jean-Claude Trichet's introductory statement to last week's ECB news conference.
sivakumar.sithraputhran@thomson.com
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