Oct. 6 (Bloomberg) -- European Central Bank President Jean- Claude Trichet moved closer to raising interest rates for the first time in five years, saying the ECB is becoming increasingly concerned about inflation in the dozen nations using the euro.

``Strong vigilance with regards to upside risks to price stability is warranted,'' said Trichet at a press conference in Athens today after the ECB's governing council left its benchmark lending rate at 2 percent. ``All the elements we have indicate that risks to price stability are on the upside. We will move if needed at any time.''

The ECB is trying to shore up economic growth after a second- quarter slowdown, while at the same time making sure a 43 percent increase in oil prices this year doesn't spark an acceleration in inflation. The pace of growth in the euro region may keep the ECB from raising rates until next year.

The euro rose and bonds declined after Trichet's comments. The currency was at $1.2120 at 3:33 p.m. in Frankfurt compared with $1.2060 at the start of the press conference. The yield on the benchmark German 10-year government bond rose to 3.18 percent from 3.17 percent yesterday. Yields move inversely to prices.

Trichet's use of the phrase ``strong vigilance'' was his first use of such language at a press conference since November 2004. Inflation accelerated to 2.5 percent in September, the eighth month the ECB has failed to push inflation below its 2 percent ceiling, after the price of oil stayed near a record.

`Riot Act'

``It was almost like he was reading the riot act on inflation,'' said David Brown, chief European economist at Bear Stearns International in London. ``But they're going to continue to be frustrated in turning this into tighter money because of the lackluster recovery.''

The ECB hasn't raised rates since October 2000 and has kept them at a six-decade low since June 2003. The price of crude, which rose to a record $70.85 per barrel in August, was at $61.20 at 4:11 p.m. in Frankfurt.

Recent economic reports have painted a mixed picture of the euro-region's growth prospects. Service industries such as banking and travel in September grew at the fastest pace since July 2004. At the same time, European retail sales fell in September for the first month in three, according to a survey of retail purchasing managers for Bloomberg LP by NTC Research Ltd.

Higher Rates Next Year?

Most investors expect the ECB to wait until the second quarter before raising rates, futures trading suggest. The implied rate on the three-month contract for June settlement was two basis points higher at 2.45 percent at 3:48 p.m. in Frankfurt. A basis point is 0.01 percentage point.

The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 14 basis points more than the ECB's key rate since the currency's launch in 1999. The Euribor three-month money market rate was 2.18 percent.

Trichet comments chime with remarks from at least four other ECB council members in the past two weeks.

Greek central bank chief Nicholas Garganas said in an interview Sept. 21 he's more worried about inflation than flagging growth. Weber said four days later the ECB will ``take appropriate action if needed'' to counter price gains.

Expectations for future price gains in the euro region are rising. Investors expect annual inflation to average 2.12 percent over the next decade compared with projections for 1.95 percent in June, French inflation-linked bonds suggest.

Inflation expectations are derived from the difference between the yields on regular French government 10-year bonds and French securities of a similar maturity that strip out expected gains in consumer prices over the next decade.

Too Much Money

An economic revival would increase the bank's concerns about consumer prices amid accelerating growth of credit and money supply. M3, the bank's barometer of future inflation, grew at the fastest pace in two years in August and has exceeded the ECB's preferred limit every month since May 2001.

``It is important,'' said Klaus Baader, an economist at Merrill Lynch & Co. in London. ``The whole trend has been accelerating in the recent past and that's got to be a concern for the ECB.''

Rising energy costs may lead inflation to average about 2.2 percent in 2005, the ECB said Sept. 1, exceeding the bank's ceiling for a sixth straight year. The ECB also trimmed its growth predictions for this year to about 1.3 percent and to around 1.8 percent next year. The forecasts mean the region would trail the U.S. for a 14th out of 15 years in 2006.

To contact the reporters on this story: Brian Swint in Athens at bswint@bloomberg.net. Simone Meier in Athens at smeier@bloomberg.net

Last Updated: October 6, 2005 10:21 EDT