May 4 (Bloomberg) -- European Central Bank President Jean- Claude Trichet signaled policy makers may raise interest rates next month because faster economic growth, record oil prices and loan demand are fanning inflation.

``If our scenario is confirmed, it's clear that a further withdrawal of monetary accommodation will be warranted,'' said Trichet at a press conference in Frankfurt today after the ECB kept its benchmark rate at 2.5 percent. It raised rates twice, from a six-decade low of 2 percent, since the start of December.

Investors raised bets the ECB would follow a June increase with at least another two moves. More than a dozen government and industry reports in the past two weeks showed economic growth in the euro region is picking up, giving the bank leeway to increase borrowing costs to curb inflation.

Trichet said the bank will show ``vigilance'' on inflation, a word he used in the past to signal a rate increase is imminent and mentioned at least three times in his opening statement.

``The governing council will exercise strong vigilance in order to ensure that risks to price stability over the medium term don't materialize,'' he said.

Bond yields climbed. The yield on the German 10-year bund rose 2 basis points to 4.02 percent by 3:08 p.m. in London. It earlier rose to 4.05 percent, the highest since Sept. 16, 2004. Europe's single currency rose to $1.2683 compared with $1.2600 before the press conference.

More After June

Some economists said Trichet's language was strong enough to suggest it will keep raising rates after June, when the governing council will meet in Madrid.

``The door is open to the possibility of stepping up the pace if required,'' said Silvia Pepino, an economist at JPMorgan Chase & Co. in London.

Futures trading shows investors anticipate the main rate reaching at least 3.25 percent by the end of the year, with the next increase in June. The yield on the three-month contract for December was at 3.53 percent at 3:19 p.m. today.

The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's benchmark rate since the currency's launch in 1999.

Interest rates are rising around the world. China last week unexpectedly increased its benchmark rate for the first time since October 2004 and the Reserve Bank of Australia surprised investors by raising its yesterday for the first time in 14 months. The U.S. Federal Reserve has increased borrowing costs 15 straight times since June 2004 and the Bank of Japan may do so later this year for the first time since August 2000.

Bank of England Holds

By contrast, the Bank of England today left its benchmark interest rate unchanged at 4.5 percent for a ninth month after inflation slowed and first-quarter economic growth matched the fastest pace in more than a year.

Inflation risks in the euro economy are mounting after a 43 percent surge in oil prices in the past year pushed the cost of crude to a record $75.35 per barrel in April. Money supply, which the ECB uses as a gauge of future inflation, grew the most in almost three years in March and loan growth was the fastest since at least 1999.

``If the economy continues to grow as expected, than the ECB must increase interest rates,'' said Hans-Werner Sinn, president of the Ifo economic research institute in an interview in Munich today. ``A benchmark lending rate of 3.5 percent may be acceptable in the mid-term, but of course only if the economy continues to grow as expected.''

New Forecasts

The ECB, which will publish revised forecasts next month, expects inflation to exceed its ceiling of just below 2 percent for a seventh year in 2006. The bank projects consumer prices to rise 2.2 percent and growth to accelerate to 2.1 percent.

Some politicians urged the ECB not to jeopardize Europe's economy, which is still being held back by consumers' reluctance to step up spending.

Retail sales in the 12 countries sharing the euro fell for a second month in March, by 0.8 percent, a report by the European Union's statistics office in Luxembourg said today. Economists had predicted an increase of 0.1 percent. Metro AG, Germany's largest retailer, yesterday said first-quarter profit dropped 44 percent.

``We don't want the improving economy in Germany to be burdened by interest rates more than is absolutely necessary,'' said Michael Glos, the country's economics minister, in an interview.

Lagging Behind

The euro-region economy will probably lag behind an expansion in the U.S. for the fifth year in 2006, growing 2 percent, forecasts by the International Monetary Fund showed April 19. The U.S., the world's largest economy, will expand 3.4 percent and Japan 2.8 percent, the Washington-based fund projected.

For now, the euro nations are coping with higher rates. German business confidence jumped to a 15-year high in April, European manufacturing activity expanded at the fastest pace in more than five years and companies across the region are reporting rising sales and profits.

Cap Gemini SA, Europe's biggest computer-services company, yesterday raised its 2006 sales forecast, and Bayerische Motoren Werke AG, the world's biggest luxury carmaker, reported first- quarter earnings rose to a record. Bertelsmann AG, the owner of Random House, said net income jumped 55 percent.

``Interest rates are still low,'' Dutch Finance Minister Gerrit Zalm said in an interview today in Brussels. ``The more and more the economic recovery takes place, interest rates should be raised.''

To contact the reporter on this story: John Fraher in Berlin at jfraher@bloomberg.net.

Last Updated: May 4, 2006 12:46 EDT