European Central Bank governing council member Erkki Liikanen said on Friday that vigilance was needed on inflation despite a sharp fall in oil prices.

In a business speech in Singapore, he said the global economy had seen a period of strong economic momentum which should stay firm with European growth now broad based.

But he said there were three downside risks to economic growth; uncertainty about the U.S. housing market, high oil prices, and global economic imbalances.

The downside risk is that we had such a strong rise in oil prices for the last few years, despite the change in the last few weeks, there is always a risk that they are a threat to inflation that the pass through is stronger when demand is high, he said.

We must be very attentive and vigilant, he said.

Liikanen, was in Singapore to attend this week's IMF/World Bank meetings.

There is some uncertainty related to the development in the housing market, he said, referring to the United States.

Liikanen, who heads the Finnish central bank, said that high oil prices however were not having the same impact on inflation as they have done in the past, thanks in part to globalisation, higher productivity and a commitment by central banks globally to price stability.

A barrage of hawkish comments from members of the ECB governing council, which sets interest rates for the euro zone, has prompted investors to rethink how high interest rates in the euro zone might go.

The ECB has raised rates four times since early December as the euro zone economy experiences its best growth in more than five years.

Annual inflation in the euro zone in August was 2.3 percent but ECB staff project it will average about 2.4 percent this year and next.

The central bank has repeated its strong vigilance on inflationary risks, signalling another increase in the benchmark rate which now stands at 3 percent.

ECB policymaker warnings about inflationary risks and confidence about the resilience of the euro zone economy, even as global growth is peaking, have markets pricing in an interest rate of 3.75 percent by mid 2007.

Liikanen is a former Finnish finance minister and ex EU commissioner.

Inflation European union