June 11 (Bloomberg) -- European Central Bank board member Juergen Stark damped speculation of a series of interest-rate increases, saying policy makers have signaled only that they may raise borrowing costs in July.

ECB President Jean-Claude Trichet said last week the bank may raise its benchmark rate by a quarter-point to 4.25 percent next month to curb inflation, which is running at the fastest pace in 16 years. Investors responded by increasing bets on higher borrowing costs.

``The markets have understood the Governing Council's signal,'' Stark, one of the ECB's toughest inflation fighters, said in an interview in Chatham, Massachusetts, late yesterday. ``However, we are not talking about a series of rate increases.''

After Trichet's comments, some investors predicted the ECB would raise its key rate three times by the end of the year. They scaled back those bets after Stark's remarks today and now expect the bank to lift the rate twice to 4.5 percent, according to Eonia forward contracts.

Yields on two-year government bonds, the most sensitive to interest-rate expectations, dropped 8 basis points. The euro fell to as low as $1.5457 from $1.5490.

Stark is ``trying to make sure that markets don't run ahead of themselves and factor in sustained rate hikes,'' said Sarah Hewin, an economist at American Express Bank Ltd. in London. The ECB will ``continue to want to see how the data unfolds and act accordingly,'' she said.

Noyer Wades In

ECB council member Christian Noyer, who has expressed concern about slowing economic growth, also moved to damp expectations for rate increases after July.

``I do not see a clear link'' between what Trichet said and market pricing after summer, Noyer said in a speech in Paris today. ``I remain confident that inflation should progressively slow in the second half.''

Oil prices above $130 a barrel and rising food prices pushed inflation in the 15-nation euro region to 3.6 percent in May, well above the ECB's 2 percent limit. Central banks around the world are changing rate policy in response to surging inflation.

Vietnam, Brazil, Chile, the Philippines and Indonesia all lifted borrowing costs this month. The Bank of Canada yesterday unexpectedly kept its benchmark rate unchanged after four straight reductions. U.S. Federal Reserve Chairman Ben S. Bernanke has also signaled the Fed is done cutting rates, saying this week he'll ``strongly resist'' any surge in inflation expectations.

Rising Expectations

In Europe, inflation expectations have started to rise. The so-called breakeven on five-year French inflation-indexed bonds was at 2.46 percent today, up from 2.12 percent in March.

``If inflation expectations are starting to increase, the central bank must be decisive,'' ECB council member Erkki Liikanen told Finnish YLE television today.

Stark said the ECB ``will do everything that is necessary to anchor inflation expectations and to deliver price stability in the medium term.''

When the ECB embarked on its last rate-tightening cycle in December 2005, Trichet said the bank was ``not engaging in a series of increases.'' It proved to be the first of eight steps.

The ECB shelved a planned ninth increase last September after the U.S. housing slump sparked a global financial-market rout, pushing the U.S. economy close to a recession and dimming the worldwide economic outlook.

Stark, 60, who heads the ECB's economics department, said ``elevated inflation rates'' are starting to squeeze purchasing power in Europe and ``growth is very likely to slow in the second quarter.''

Still, ``we will see a gradual recovery as soon as the second half of this year,'' he said. ``The economic fundamentals in the euro area are sound.''

``I don't think he's saying one and done,'' said Klaus Baader, chief European economist at Merrill Lynch & Co. in London. ``I think we can expect two 25-basis-point interest-rate increases. Is that a series?''

To contact the reporter on this story: Gabi Thesing in Chatham at gthesing@bloomberg.net

Last Updated: June 11, 2008 08:25 EDT