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Trichet: ECB Must Stop Inflation Spreading

Reuters
Monday, 24 Dec 2007 | 3:27 AM ET

The European Central Bank is determined to stop increases in oil and food prices becoming entrenched in a broader inflation rise, President Jean-Claude Trichet said in a newspaper interview published on Monday.

Trichet told the Financial Times inflation risks in the 13-nation region were to the upside while growth risks were to the downside, giving the same assessment as when the ECB left rates on hold at 4 percent earlier this month.

Some policymakers did however argue for a rate rise, despite interest rate cuts by other major central banks, and Trichet said the ECB wanted to prevent current high inflation rates from feeding into higher inflation expectations and setting off a wage-price spiral.

"I would say that you have to make a judgment. As you know, the judgment of the Governing Council is that risks to price stability are on the upside," he said, listing factors such as oil and commodity prices.

"On top of that, what is decisive are the second round effects. There we have the risk, and I was very clear that on behalf of the Governing Council, we would not let those second round effects materialise, and that we were alert to avoid those second round effects materializing."

The interview was conducted on Dec. 13 but published on Monday.

The presence of upside price risks meant the ECB had to keep interest rates unchanged, Trichet said.

"That's the reason why we didn't follow other colleagues, but the other colleagues are in a different situation. They see different things and their own analysis I respect," he said.

Asked if he saw the global credit crisis having a severe negative impact on the euro zone economy in 2008, he said: "It is not our baseline scenario."

Contact Europe: Economy

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