July 3 (Bloomberg) -- European Central Bank President Jean- Claude Trichet played down prospects of further interest-rate increases, saying the quarter-point move today will help bring inflation back below 2 percent.

``Today's decision will contribute to achieving our objective,'' Trichet said at a press conference in Frankfurt after the ECB raised its benchmark lending rate to 4.25 percent. Trichet said he has ``no bias'' on further moves.

The euro slumped against the dollar and European government bonds rose after Trichet's remarks. The ECB is weighing the risk that higher rates will exacerbate an economic slowdown against the danger that the fastest inflation in 16 years will feed into wages and prices.

Trichet ``suggested they currently have no plans to raise interest rates again,'' said Dario Perkins, an economist at ABN Amro NV in London. ``Of course, that doesn't rule out further moves. It will depend on what happens to inflation and, more importantly, inflation expectations.''

The euro dropped 2 cents to $1.5703 at 10:47 a.m. in New York. It rose to the all-time high of $1.6019 on April 22. The yield on the German two-year note fell more than 20 basis points to 4.49 percent.

Striking a Balance

Trichet's comments may reflect the balance he must strike between adhering to the ECB's mandate and acknowledging the growth concerns of some euro-region countries that have been hurt by a real-estate bust.

French Finance Minister Christine Lagarde said today that higher rates may hurt Europe's competitiveness by pushing the euro up against the dollar as the U.S. Federal Reserve keeps its key rate at 2 percent.

Trichet said last month that some of the ECB's 21 policy makers were against increasing borrowing costs. Today he said the decision to raise rates was ``unanimous.''

``We find it hard to believe that no central bank representative from any of the 15 member states voiced his opposition today, especially given the growing pessimism and dire conditions in some countries,'' said Kenneth Broux, an economist at Lloyds TSB Corporate Markets in London. ``This would imply that Ireland and Spain agreed with today's rate increase, despite the crisis in their construction and real estate markets.''

Inflation Concerns

Still, the ECB sees ``increasing upside risks'' to price stability, which it defines as keeping inflation just below 2 percent over the medium term, Trichet said. The bank has ``no pre- commitment'' and will do whatever is necessary to combat inflation, he added.

Oil prices have doubled over the past year, driving inflation to 4 percent in June. They breached $145 a barrel for the first time today.

Unions are already pushing through bigger pay claims. European labor costs rose 3.3 percent in the first quarter from a year earlier, the most in almost five years.

Trichet took economists by surprise last month when he said the ECB may raise rates. Since then, inflation expectations, as measured by the breakeven on five-year French inflation-indexed bonds, have increased. They reached a record 2.83 percent today.

``If they need to move again, then they will,'' said Charles Diebel, head of European interest-rate strategy in London at Nomura International Plc. ``We sense that they are simply not sure whether they will have to move again and likewise are nervous about the decision they have just taken in terms of the risks to growth it presents.''

Slowing Growth

Companies may find it more difficult to raise prices and wages as the economy cools. European manufacturing contracted in June, confidence dropped and retail sales plunged.

Growth may weaken to 1.5 percent next year from 1.8 percent this year, according to ECB staff projections. Trichet said economic fundamentals are still ``sound,'' even with ``high'' uncertainty surrounding the outlook.

Even after today's comments, investors are fully pricing in another quarter-point rate increase to 4.5 percent by the end of the year, Eonia swap contracts show. They scaled back bets on a third move by March, with the contract dropping 10 basis points to 4.7 percent.

Central banks from Russia to Brazil are raising borrowing costs as inflation replaces the global credit crunch as their biggest concern. Indonesia today increased its key rate for the third time in as many months and Sweden's Riksbank lifted its benchmark to a 12-year high.

To contact the reporters on this story: Simone Meier in Frankfurt at smeier@bloomberg.net; Christian Vits in Frankfurt at cvits@bloomberg.net.

Last Updated: July 3, 2008 11:17 EDT