The European Central Bank (ECB) President Jean-Claude Trichet on Thursday took most economists and markets by surprise when he hinted that he may opt for a rate hike in the central bank's policy meeting next month to contain spiraling inflation.
At his monthly news conference in Frankfurt, Trichet said a move at the central bank’s next meeting was possible, but not a certainty. The 23-member Governing Council never commits to a rate move ahead of time, he said, adding that a decision will depend on incoming data.
Trichet also said that the ECB's decision to leave rates unchanged on Thursday was "unanimous."
He added that any subsequent move to hike interest rates would "certainly not" be the start of a "series" of increases in borrowing costs.
Trichet warned that “strong vigilance” was required in order to contain upside risks to price stability. The use of the phrase “strong vigilance” was interpreted by most experts as an indication that a rate hike is coming.
Trichet also omitted language seen in recent ECB statements describing current interest rates as “appropriate,” which had been taken to mean that rates will remain on hold.
He also said the central bank would continue to fully meet demand for loans from commercial banks across the euro zone over the next three months.
Euro-zone inflation hit a 2.4% annualized rate in February, according to a preliminary estimate by the European Union’s statistics agency, rising further above the central bank’s target rate of near but just below 2%.
This target applies over the medium term, defined as roughly two to three years.
On Thursday, the ECB raised its inflation forecasts, with 2011 inflation expected at 2.3%, falling back below target to 1.7% in 2012.
The Trichet remarks boosted the euro to its highest level against the dollar since November.
The dollar was headed for its first weekly gain versus the yen in three weeks amid increasing evidence that the world's largest economy is gathering momentum.
The greenback strengthened against most major counterparts.
The yen rose for the first time in three days versus the euro on speculation that Japan’s exporters bought the currency after it touched a four-month low.
The Australian dollar fell to the lowest in five weeks against the euro on prospects that the ECB will raise interest rates faster than the Reserve Bank of Australia.
The dollar traded at 82.37 yen as of 12:57 p.m. in Tokyo today from 82.44 yen in New York yesterday when it touched 82.52 yen, the strongest since Feb. 24.
The US currency is poised for a 0.8 percent advance against the yen this week. The greenback was at US$1.3955 per euro from US$1.3969 yesterday.
The euro fell to 114.94 yen after earlier reaching 115.17 yen, the most since Nov. 4, from 115.16 yen yesterday.
The so- called Aussie declined 0.1% to 72.59 euro cents, after dropping to 72.44 earlier, the weakest since Jan. 28.