The President of the European Central Bank, Jean-Claude Trichet, has given a strong hint that the bank may raise interest rates in the eurozone as soon as next month, having kept them once again on hold at its rate-setting meeting yesterday.
Mr Trichet's use of the expression "strong vigilance" as he talked about the months ahead was widely taken as code for a rise: he used the same term when he last wanted to increase rates, in 2008. The move may add to pressure on the Bank of England to follow suit, though the Bank's deputy governor, Charles Bean, gave little indication of a rise before May in a speech yesterday, when he warned of theeffects of the commodity boom.
Mr Bean said: "There must be a risk that continued turmoil in the Middle East and North Africa results in a substantial oil price spike, present Opec spare capacity notwithstanding.
"Looking even further ahead, there may continue to be general upward pressure on the prices of exhaustible resources as demand from the emerging markets continues to grow."
However, the overall tone of Mr Bean's speech gave little support to the idea that the Bank will raise interest rates before it is expected to do so, after the May meeting of the Monetary Policy Committee. "If anything, inflation may prove a little more persistent next year than presently embodied in our projections," he said.
"On its own, that might appear to imply that Bank rate needs to rise faster than implied by the market yield curve that underpins our projections, but the risk of inflation staying above the target into the medium term needs to be weighed against the downside risk to growth."
The rising oil price, while adding to inflationary pressures, would also be a depressing factor on growth. Though oil fell back slightly yesterday, to around $113 for a barrel of Brent crude, the Energy Secretary, Chris Huhne, said that a doubling in the price of oil this year, to $160 a barrel, would trim 1.5 per cent, or £45bn, from GDP by 2013.Reuse content