Trichet steps up inflation rhetoric, hints at hike

The central bank's Governing Council opted to hold rates for the 12th straight meeting on Thursday but Trichet said after the decision that it could back a small rise at the next one on 3 July "in order to secure the solid anchoring of inflation expectations, taking into account the situation."

"I don't say it's certain. I say it's possible," he said, after confirming that several of the committee's 21 members had pushed for a rate hike at Thursday's meeting. "A number of us considered that there was a case for increasing rates but later some amongst us considered there was not necessarily that case," he said.

The president said that the council was "in a state of heightened alertness", which in the past has been taken as ECB-speak for an upcoming rate rise.

Frankfurt's DAX exchange and the Paris-based CAC bourse both fell sharply on the back of Trichet's comments, made shortly after 14:30 Frankfurt time.

"Financial markets have clearly taken umbrage at the press conference, specifically the rate hike threat," said Marc Ostwald, an analyst at Insinger de Beaufort, an advisory firm. "In truth, this was and, was not, a surprise."

"With the inflation picture deteriorating, the ECB's even more hawkish rhetoric on inflation in recent weeks had to be followed with at least the threat of a rate hike," Ostwald said. "This however still looks to be an exercise in preserving credibility than tipping the scale in favour of July move."

At 3.6%, eurozone inflation is now at its highest level since the single currency was introduced in 1999. Trichet warned that the risks of the current measure influencing price stability in the medium term had "increased further" since May's meeting.

"Inflation is now expected to remain high for a more protracted period than previously thought," Trichet said. "Upside risks to price stability over the medium term are also confirmed by the continuing very vigorous money and credit growth and the absence of significant constraints on bank loan supply up to now."

Click here to read Trichet's opening statement