Higher oil prices and a weaker exchange rate are causing increases in import and producer prices, the ECB said. Signs that these price rises are trickling down to prompt higher consumer prices may already be emerging."The balance of risks to price stability is on the upside," the ECB said.

"These risks will need to be monitored and assessed continuously." The ECB's policy-making council next meets March 16, and then again on March 30. Most economists expect the ECB to raise its main refinancing rate of 3.25% by a quarter or half percentage point at one of these meetings, especially after Wim Duisenberg, the ECB's president, said last week there can be no doubts about the direction of monetary policy in the "near future."

As the globe shakes off the effects of last year's financial crises and growth seems set to rise, interest rates are heading up. The U.S. Federal Reserve is expected to raise rates later this month. The Bank of England, as widely anticipated, kept its interest rate steady at 6% after lifting rates four times in the past six months, but economists expect the bank to increase the cost of borrowing to 6.5% before the end of June.

The inflation concerns for the euro area come on the back of a stronger economy, which expanded 3.1% in the fourth quarter from a year earlier after growing 2.3% in the third, according to a European Union report. Exports and household consumption boosted growth, the EU's statistics agency said. This brings 1999 growth to 2.2%, down from 2.8%, but the ECB has said economic growth this year could exceed 3%. Some private banks even bet growth could reach 3.4%.

"There is by now sufficient evidence to say that the euro area is enjoying a strong upturn in growth," said Christian Noyer, the ECB's vice president. Otmar Issing, ECB executive board member and chief economist, underscored the inevitability of higher interest rates as conditions in the 11-nation euro area become clearer. "The president's statement last week delivered an unequivocal message, that the direction of our monetary policy under the current circumstances - strong growth that we welcome very much but also the gradual increase in inflationary risks - is clear."

The ECB also reiterated its worries about the weakness of the euro, which has fallen some 17% against the dollar since it began trading a year ago. The ECB said depreciation over the past few months isn't justified, given improved prospects for the economy, and is sparking inflation. "Exchange rate developments have thus remained a cause for concern," the ECB said.

-- The Wall Street Journal