FRANKFURT (Bloomberg) — European Central Bank president Jean-Claude Trichet signalled the bank is ready to raise interest rates next month after leaving borrowing costs unchanged yesterday.ECB policy makers, who have raised the benchmark rate six times since December 2005, kept it at 3.5 percent, as predicted by all 48 economists surveyed by Bloomberg News. The Bank of England held its key rate at 5.25 percent, a five-year high.

“Strong vigilance remains of the essence so as to ensure that risks to price stability over the medium term do not materialise,” Trichet said at a press conference in Frankfurt yesterday. The bank’s “monetary policy remains accommodative” and its interest rates are “still at low levels”.

Trichet has used the word “vigilance” in the past to signal a rate increase is imminent. The ECB is raising rates to curb inflation as the fastest growth in six years enables companies to raise prices and encourages workers to demand more pay.

The ECB “confirmed that it intends to raise rates to 3.75 percent in March,” said Holger Schmieding, chief European economist at Bank of America in London. By putting particular emphasis on wage negotiations, Trichet suggested “wage inflation could play a major part in any decision about when and how far to raise rates later this year”.

IG Metall, Germany’s biggest labor union, on February 6 demanded a 6.5 percent pay increase for its members, defying the ECB’s calls for wage restraint.

“Stronger than currently expected wage developments pose substantial upward risks to price stability,” Trichet said.

Euro-region inflation may slow to about 2 percent this year from 2.2 percent in 2006, according to ECB forecasts. It aims to keep inflation just below 2 percent. The bank is concerned that the pace of economic expansion may drive up prices.

The ECB raised its growth forecast in December, predicting the economy will expand around 2.2 percent this year after 2.7 percent in 2006, the most since 2000. Its next set of economic projections are due in March.

Booming exports have prompted companies to increase spending and hiring, pushing the euro-region unemployment rate down to 7.5 percent in December, the lowest since records began in 1993. Growth in European service industries from airlines to banks, the biggest part of the economy, unexpectedly accelerated in January, an industry report showed last week.

At the same time, M3 money supply growth, which the ECB uses as a gauge for future inflation, accelerated in December to the fastest pace in 17 years on increased borrowing.

Trichet said inflation may slow in the first half of this year due to base effects associated with previous oil-price increases. “But these effects would be temporary,” he said. “Later in 2007, inflation rates are expected to rise again.”

That comment is “the clearest indication, in our view, that the ECB will not stop at 3.75 percent,” said Kenneth Broux, an economist at Lloyds TSB Corporate Markets in London. “Our forecast is for a rise in euro-zone rates to 4 percent in the second quarter.”

Slowing economic growth may damp inflation pressures and limit how far the ECB can raise borrowing costs.

Euro-region manufacturing growth slowed for a third month in January, and German factory orders, industrial production and exports unexpectedly fell in December. Germany is Europe’s largest economy.

“Let’s be honest, recent data has not been as spectacular as some of the general euphoria would suggest,” said Thomas Mayer, chief European economist at Deutsche Bank AG in London, who doesn’t expect the ECB to raise its key rate beyond 3.75 percent.