European Central Bank president Jean-Claude Trichet said today that a rise in the bank's main interest rate next month "is possible," after warning that vigilance is needed on rising inflation.
An "interest rate increase at the next meeting is possible" said Trichet, suggesting it would be a small one and that it would not necessarily mark the start of a series of rate hikes.
The euro surged close to $1.40 following the comments.
At about 1345 GMT, the European single currency spiked as high as $1.3956, hitting the highest level since November 9, 2010. That compared with $1.3867 late in New York on Wednesday.
The ECB kept its main interest rate at a record low of 1.0 percent Thursday, with analysts so far expecting it to begin raising rates in the second half of this year.
Trichet warned that rising commodity prices means "strong vigilance" is needed on inflation, using tougher language than normal that could signal the bank is planning to rise rates earlier than previously expected.
"Strong vigilence is warranted with a view to containing upside risks to price stability," said Trichet.
"Trichet has signalled that the central bank will raise its refi rate next month," said Fortis economist Nick Kounis, focussing on Trichet's use of the phrase 'strong vigilence'.
"This term has almost always been followed by a rate hike at the subsequent meeting in the past."
He added: "Overall, the ECB is once again living up to its reputation as a single-minded inflation fighter."
The ECB also revised upwards its inflation estimates to 2.3 percent in 2011 and 1.7 percent in 2012 from previous figures of 1.8 percent and 1.5 percent.
The ECB's medium-term inflation target is just below 2.0 percent.
While commodity prices are expected to stabilise later this year, Trichet has often warned a rise in inflationary expections and demands for wage increases needs to be avoided.
"The continuing firm anchoring of inflation expectations is of the essence," Trichet said Thursday.
The ECB will also continue its crisis measure of offering unlimited low-interest loans to eurozone banks through June.
The ECB's Governing Council "decided to continue conducting its main refinancing operations ... at a fixed-rate tender procedure with full allotment for as long as necessary."
Trichet said this exceptional measure, taken to support eurozone commercial banks during the global economic crisis, would continue to at least July 12.
The ECB also hiked its forecasts for eurozone growth to 1.7 percent in 2011 and to 1.8 percent in 2012.