ECB keeps rates steady

The ECB has raised rates four times in the past ten months, but the Trichet suggested there is more tightening to come, possibly in October. "If our assumptions and baseline scenario continue to be confirmed, a progressive withdrawal of monetary accommodation will remain warranted," he said.

The tone of central bank's president, Jean-Claude Trichet, was notably hawkish: "strong vigilance remains of the essence on the [risk of inflation], with key ECB interest rates at still low levels in both nominal and real terms," he said.

Trichet also warned European governments not to let the current growth spurt distract them from budgeting to meet the stability and growth pact. "All countries should take advantage of the current economic recovery to consolidate fiscal balances. Especially countries in excessive deficit procedure and with a high debt-to-GDP ratio should use the current economic recovery to bring the public deficit ratio to below 3% within the agreed deadline," he said.

While bonds fell on the announcement, the euro rose to session highs of around $1.2880 from $1.2860 immediately after Trichet's comments, before trading back down to $1.2874, up 0.3% on the day.