As expected, the European Central Bank (ECB) kept its Refi rate unchanged at 3.75% this morning, but signaled that it expects a rate hike at the June 6 meeting. Trichet stated that "strong vigilance is of the essence in order to ensure that risks to price stability over the medium term do not materialize." Once again, the policy statement and subsequent press briefing talked about the ongoing strength of the Euro-zone economy and about upside risks to inflation - including buoyant money supply and credit growth, higher oil prices, and potential wage developments. Interestingly, the statement also noted a new source of upside risk - high capacity utilization.

The headline rate of inflation has been below the ECB's 2.0% target for the past eight months, but money supply growth is certainly robust, with the annual increase in M3 accelerating again in March to hit a 24-year peak of 10.9%.

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Today, the ECB remained tight-lipped on the policy outlook for the second half of the year, and Trichet refused to be drawn on whether he thought rates would still be "accommodative" after the June meeting. Much will depend on the euro - a continued rise in the currency will help to keep imported inflation in check. However, with the ECB apparently more focused on domestic drivers of inflation, the currency's climb toward $1.40 is unlikely to be enough to keep rates from rising to 4.25%, or even higher, before the year is out.