European Central Bank President Mario Draghi said on Monday that the underlying inflation in the euro area is set to rise in coming months, and that there are signs of labor shortages in some countries in the single-currency union.
Euro rose sharply on Draghi's comments as market interpreted them as hawkish, signaling a hike in interest rates late next year.
Economists widely expect the bank to hike interest rates only in the second half of next year.
"Looking forward, annual rates of HICP inflation are likely to hover around current levels in the coming months and are projected to reach 1.7 percent in each year between now and 2020," Draghi said in the introductory statement at a European Parliament Committee hearing.
"This stable profile conceals a slowing contribution from the non-core components of the general index, and a relatively vigorous pick-up in underlying inflation," he added, with reference to the latest ECB Staff projections.
Core inflation, which excludes the volatile food and energy prices, are projected to reach 1.8 percent in 2020.
Draghi noted that the euro area growth is continuing at a robust pace amid high level of capacity utilization and labor markets are tightening with signs of labor shortages in some countries and sectors.
Eurozone unemployment rate was 8.2 percent in July.
"Underlying inflation is expected to increase further over the coming months as the tightening labor market is pushing up wage growth," Draghi said.
Regarding forward guidance, Draghi said it has become an important instrument for all major central banks including the ECB.
On September 13, the ECB left its interest rates, asset purchases and forward guidance unchanged.
The main refi rate is currently at a record low zero percent and the deposit rate at -0.40 percent. The marginal lending facility rate is 0.25 percent.
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