Weber says markets have understood ECB signal

FRANKFURT, June 6 (Reuters) - Financial markets have clearly understood the European Central Bank's central message on a possible July hike in interest rates, ECB Governing Council member Axel Weber said on Friday.

ECB President Jean-Claude Trichet shocked financial markets on Thursday when he revealed the bank's decision-makers had weighed up an immediate hike in rates and were seriously considering raising them next month.

The euro-zone central bank said inflation risks had increased and released higher staff inflation forecasts for 2008 and 2009.

"The Governing Council has sent a clear signal to markets and to the broader public yesterday, which seems to have been well-understood, that such an outlook on inflation is not acceptable for a stability-oriented monetary policy," Weber said in a speech at the London School of Economics.

Although Trichet stopped short of guaranteeing the rise, financial markets have taken his words as a sure sign that rates are on their way up next month.

Markets now price in around 60-65 basis points of ECB tightening this year and a full 75 basis points of hikes to 4.75 percent by the end of the first quarter next year, according to Eonia rates.

"Current inflation rates as well as the medium-term outlook on consumer prices leaves us in a state of heightened alertness," said Weber, echoing Trichet's Thursday comments.

"Even under the optimistic assumption that recent dynamics in commodity prices diminishes over the projection horizon and that there will be no broad-based second-round effects, monthly HICP inflation rates will stay above our definition of price stability far into 2009."

"The risks to this outlook are clearly on the upside."

Whereas many euro zone economists expect the economy to take a nosedive in the latter parts of the year as the impacts of higher consumer prices, a strong euro and global financial worries feed through, the ECB expects the slowdown to be short lived.

"The euro area remains on solid fundamentals with regard to real economic growth," said Weber.

"While we will see a moderation in growth rates over the coming quarters, both in the euro area and also in Germany, already at the turn of the year we will have reached the trough," he added. (Reporting by Marc Jones; editing by Keith Weir)