Oct. 21 (Bloomberg) -- European Central Bank governing council member Klaus Liebscher said rising oil prices are creating ``significant upside risks'' to price stability, suggesting he will back further increases in borrowing costs.

``The picture is that there is no relaxation concerning the risks to price stability,'' Liebscher, 67, said in an interview in Washington today. ``It's the other way around.''

The ECB left its benchmark rate at 4 percent this month after shelving a planned increase in September to assess the effect of the U.S. housing slump and rising credit costs. At the same time, inflation breached the ECB's 2 percent limit for the first time in more than a year last month, and oil prices reached a record $90 a barrel on Oct. 19.

In separate interviews today, Liebscher's colleagues on the governing council Axel Weber and Nicholas Garganas said inflation risks in the euro area had ``increased.''

``We will see how next year develops, but the level has obviously increased,'' said Liebscher, who is also governor of Austria's central bank.

In September, the ECB forecast that inflation will average 2 percent in 2007 and 2008, and that growth will slow to 2.3 percent in 2008, from 2.5 percent this year. Last year, the 13- nation economy expanded 2.8 percent, the fastest rate since the turn of the decade.

Liebscher said the economy ``fortunately is in very good shape'' and ``we are better prepared to cope with certain challenges ahead of us like the oil price.''

Economists are divided over whether the ECB will raise rates further. While Commerzbank AG expects the governing council to keep lending costs unchanged for the next year, Merrill Lynch & Co. sees an increase to 4.25 percent in December. Bear Stearns Cos. anticipates policy makers will cut the benchmark rate in the first quarter of 2008.

To contact the reporters on this story: Gabi Thesing in Washington at gthesing@bloomberg.net. Meera Louis in Washington at mlouis1@bloomberg.net.

Last Updated: October 21, 2007 16:14 EDT