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ECB flags July rate rise as inflation stays high

By Jan Strupczewski

BRUSSELS (Reuters) - The European Central Bank signaled it would raise interest rates again next week as data showed inflation in June stabilized well above the bank's target.

"We are strongly determined to secure that inflation expectation remain firmly in-line (with our expectations)," ECB President Jean-Claude Trichet told the European Parliament's economic and monetary affairs committee in regular testimony.

"The current monetary policy is accommodative and ... as I said we are in a state of strong vigilance," he said.

The phrase "strong vigilance" has regularly been deployed to signal a rate hike at the next meeting and the ECB is meeting on interest rates next Thursday.

The euro hit a fresh three-week high against the dollar in response, while it also remained supported as Greece moved a step closer to securing international aid after voting in favor of austerity measures.

The European Union's statistics office said consumer prices in the 17 countries using the euro were 2.7 percent higher in June than a year earlier, the same as in May. Economists polled by Reuters had forecast a figure of 2.8 percent.

The ECB wants to keep inflation below, but close to 2 percent and already raised its refinancing interest rate in April by 25 basis point to 1.25 percent to curb price growth.

No breakdown of monthly data is available with the early estimate, but the June inflation is likely to be largely an result of more expensive oil.

"There are signs that euro zone price pressures are starting to ease, although much will clearly depend on oil price developments," said Howard Archer, economist at IHS Global Insight.

"Slowing euro zone growth after the first-quarter spike up and still relatively high unemployment are likely to put a brake on underlying inflationary pressures," he said.

"It is notable that the European Commission's business and consumer confidence survey for June showed consumers' inflation expectations falling back appreciably for a second successive month and pricing expectations among companies falling back in all sectors," he added.

Trichet's use of the key "strong vigilance" phrase to signal a rate rise ends market speculation that the bank could delay another increase in borrowing costs because of the debt crisis in Greece and the contagion threat it poses to other euro zone countries.

But economists said Greece's problems and their potential impact on the euro zone could still make the bank delay the next interest rate rise, which economists expect will happen later this year, taking the refinancing rate to 1.75 percent.

"Slowing euro zone growth, evidence that underlying inflationary pressures remain moderate and still serious concerns over the Greek situation suggest that the ECB could hold off from acting for some time to come after the signaled July interest rate hike," Archer said.

(Reporting by Jan Strupczewski, additional reporting by Paul Carrel in Frankfurt, editing by Rex Merrifield)

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