Inflation risks have increased in the medium term and the European Central Bank stands ready to counter inflationary pressures, ECB President Jean-Claude Trichet told the EU Parliament on Wednesday.
But he signalled that a possible rate rise next week does not necessarily mean the beginning of a tightening cycle.
Economists expect the ECB to raise its key interest rate by a quarter point to 4.25 percent when the governing council meets next week, as Trichet said at the beginning of the month that the bank may raise the rate slightly to fight inflation.
"We signaled that we are in a state of heightened alertness. The governing council will continue to monitor very closely all developments," Trichet told the EU Parliament. "The governing council is strongly determined to secure the firm anchoring of inflation expectations."
He played down market speculation of a series of rate rises, stressing however the flexibility of the central bank's monetary policy.
"I didn't say that we would envisage a series of increases. I didn't say that. That being said ... of course we never precommit," Trichet said.
He said price-rise risks have increased in the medium term, also because of the so-called second-round effects -- wage and price rises across the board as a result of oil and food price increases.
"The risk of triggering an inflationary wage-price spiral is particularly acute, especially where nominal wage indexation schemes exist."
Trichet said he "was not sure" speculators were entirely to blame for the rise in commodities prices. "It seems to me that the major issues are associated with supply and demand."
The rise was not a shock but a regular increase of prices, suggesting the idea that the phenomenon is demand driven rather than supply-driven, where there would be a shock and then stabilization, he said.
But, Trichet added, "I don't exclude that we are far above an equilibrium price, and that we will see prices going down to a much more appropriate level that would also be much more sustainable and that would permit a lot of investment to be done on a
basis that would be much more secure than the present very high level."
Reallocation of portfolios giving more weight to commodities was also partially to blame for the high commodities prices, he said.