Rate rise to push inflation in euro zone below 2%

A quarter percentage point rise in the European Central Bank's (ECB) main interest rate should be enough to bring euro zone inflation back below two per cent, ECB Executive Board member Lorenzo Bini Smaghi said.

"In our view such a tightening, which I would call significant even if [it is] just 25 basis points, should be able to bring inflation back below the two per cent target in the next 18-24 months," he said in an interview with Italian newspaper Il Sole 24 Ore published yesterday.

In reaction to Bini Smaghi's comments the euro trimmed gains versus the US dollar and bund futures rose.

The ECB has a target for the annual inflation rate in the euro area of just below two per cent. In May this year, inflation in the currency bloc hit a record high of 3.7 per cent.

"Our latest forecasts indicate inflation might stay above two per cent for the next two years," Bini Smaghi said. "And we face risks of a wage-price spiral, as confirmed by a rise in unit labour costs of more than three per cent in the first quarter."

The ECB is expected to raise its key rate to 4.25 per cent in July from four per cent at present.

"We have to do our part, otherwise we risk a rise in inflation expectations," said Smaghi.

The market has priced in further tightening later in the year but several of the bank's Governing Council members have tried to make clear the possible July rate rise is not likely to mark the beginning of a tightening cycle.