FRANKFURT, Feb 2: The European Central Bank held its key interest rates steady as expected on Thursday, but signalled it would raise them next month to keep a lid on inflation as recovery in the 12-country eurozone gets underway.

At its regular monthly policy-setting meeting, the ECB held the minimum bid rate for its regular refinancing operations steady at 2.25 per cent, after raising it by a quarter of a percentage point on December 1.

The bank also held its two other key rates — the deposit rate and the marginal lending rate — unchanged at 1.25 per cent and 3.25 per cent respectively.

But at the news conference after the meeting, ECB President Jean-Claude Trichet left no doubt that a further rise in borrowing costs was on the cards by stressing the inflationary risks in the single currency area and saying the markets were correct in their assumption of a pending move.

It was reasonable for the world’s financial markets to assume that the ECB could raise its key interest rates in the near term, Trichet said.

“Markets’ near-term expectations with regard to interest rates are reasonable,” Trichet said.

After the quarter-point move in December, most ECB watchers are pencilling in a further rise in March.

Nevertheless, the Frenchman insisted again that the ECB had not embarked on an “a-priori series of rate increases”.

The bank would tighten monetary conditions in the 12-country eurozone when and as it saw fit. But it was “not planning a rate hike every month,” Trichet said.

Notable in the news conference was the re-emergence of the word “vigilance” in Trichet’s vocabulary, which was seen by the markets as a signal for pending rate rise.

“We will exercise vigilance so as to ensure the solid anchoring of long-term inflation expectations at levels in line with price stability,” the central banker said.

The last time Trichet talked about the need for vigilance was in the run-up to the December 1 rate hike.

Area-wide inflation stood at 2.2 per cent in December, still above the ECB’s ceiling of 2.0 per cent.

And in the short-term, annual inflation rates “may again increase somewhat, reflecting in particular renewed increases in energy prices,” Trichet said.

In addition, the money supply was also growing faster than the ECB would like and demand for credit was strong, all factors that could fuel inflation further down the line.—AFP