Jean-Claude Trichet, president of the European Central Bank (ECB), has told the EU Parliament rates must go up.
Mr Trichet's comments were seen as an early announcement
The ECB has kept interest rates at 2% for more than two years, but now believes they need to go up to tackle the threat of oil-driven inflation.
Mr Trichet said the governing council was "ready to take a decision to moderately augment the present level of interest rates" at its next meeting.
The news means that ECB rates are likely to rise by 0.25% on 1 December.
The move would affect interest rates in the 12 countries that use the euro, the so-called eurozone.
Mr Trichet warned that inflationary pressures were growing in the eurozone despite weak economic growth.
He said that consumer inflation now stood at 2.5%, well ahead of the ECB's target of 2%, and that monetary indicators and the level of borrowing both pointed to growing pressure on prices.
The intention was to "preserve and maintain" price stability and to maintain the credibility of the ECB as an inflation-fighter.
This would lead to lower interest rates, more job creation, and easier borrowing for governments in the long-term.
"We will do what we have to do," Mr Trichet said, but he denied that there was any definite plan for further rate increases in the future.
But his comments were criticised by politicians who warned that the ECB could be choking off the EU's fragile economic recovery.
Luxembourg's finance minister Jean-Claude Juncker, who chairs the eurozone group, said that he still saw no signs of inflationary wage developments in the eurozone that would warrant an interest rate rise by the European Central Bank.
And politicians in the EU Parliament from across the political spectrum wondered why EU consumers needed to pay higher mortgage rates when unemployment was still so high.
Some commentators say the ECB is likely to raise rates several times in the months ahead to keep the lid on inflation in the eurozone, with an ultimate target of 3%.
"We currently favour a rate hike every three months," said Bob Maes, fixed income strategist with KBC.
However, some economists also questioned whether more rate hikes were needed.
"An ECB rate hike in December would be a classic case of bad timing," said David Brown, European economist at Bear Stearns.
But the ECB argues that it is better to take modest action sooner rather than wait for inflationary pressures to build.
"Prevention is better than cure and a moderate rate rise is better sooner than later," said ECB governing council member Klaus Liebscher.
Economic growth in the eurozone is predicted to recover to 1.9% in 2006, following a very weak 1.3% this year.
Bear Stearns predicts that interest rates of 3% could reduce economic growth by 0.4%.