Firm and timely action by the European Central Bank is necessary to head off risks to price stability, ECB President Jean-Claude Trichet said on Wednesday.
Addressing the European Parliament's economic and monetary affairs committee, Trichet stuck closely to the text of a statement issued earlier this month after the ECB's Governing Council raised interest rates to a five-year high of 3.5 percent.
"Acting in a firm and timely manner to ensure price stability in the medium term is warranted," said Trichet. "The Governing Council will therefore monitor very closely all developments so that risks to price stability over the medium term do not materialise."
Financial markets are anxious for any hint from Trichet as to whether the ECB might raise rates again in 2007 -- following six increases in the past year -- and if so, when.
Earlier this month, Trichet left the door wide open on rates in the face of uncertainty over the economic outlook. He said it would be wrong to assume a February rate rise, despite wording that prepared the markets for an early move.
Since then, strong German business confidence data for December, a halt in the euro's rapid exchange rate gains and signs that the giant U.S. economy will glide to a gentle slowdown have buoyed optimism about the euro zone.
Debt traders are estimating that the ECB will raise its benchmark rate again to 3.75 percent by mid-2007 to ensure that inflation, currently meeting the ECB's price stability goal at 1.9 percent in November, remains in check.