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ECB's Trichet: Euro Zone Inflation Risk Remains


Risk to euro zone inflation remain and the European Central Bank will do what is necessary to ensure stable prices, the authority's president, Jean-Claude

Trichet, said in newspaper interviews published on Monday.

In a joint interview with Italy's La Repubblica, Spain's Expansion, Slovenia's Dnevnik and the Irish Independent, Trichet declined to give any hints on the timing of future policy moves but said firm and timely action was still warranted.

"In the opinion of the ECB Governing Council the outlook for price developments in the medium term remains characterised by upside risks," he said, according to a text published on the ECB's Web site.

“Every observer, investor, every saver, in Europe and the rest of the world, knows that we will do what is necessary to ensure price stability."

"They also know our policy is not to pre-commit in any respect to future action. We will do what is necessary, but we never unconditionally pre-commit."

The ECB has added 1.75 percentage points to borrowing costs since December 2005, lifting benchmark euro zone rates earlier this month to a five-year high of to 3.75%.

Trichet repeated the description given after the March 8 policy meeting that rates remained "moderate" and monetary policy was "on the accommodative side."

Before the latest hike, the ECB had said rates were low and monetary policy accommodative, but Trichet declined in the interviews to elaborate on whether changing the wording meant rates were nearing a peak.

Trichet also declined comment on market pricing for future rate moves. Although most analysts expect a further hike to 4% by June, markets have not fully priced this in.

Backing up the ECB's assessment of inflation risks ahead, Trichet said money and credit growth remained vigorous and that past decisions had taken rapid home lending growth into account. But he noted that national real estate markets were now slowing in some countries, such as Spain and Ireland.

Growth "Encouraging"

Inflation in the 13-nation euro zone has dropped below the ECB's 2% price stability ceiling in recent months, but policy makers expect it to rise again in the second half of the year as favourable effects from cheaper oil fade.

Solid economic growth is seen as another risk to prices, and Trichet repeated appeals for moderation in wage settlements, along with fiscal soundness and structural reforms to boost productivity and job creation.

Although the ECB does not see a need to increase its estimate for potential growth -- the rate at which an economy can grow without creating price pressures -- from the current 2-2.25% level, it was keeping a close eye on developments in the labour market. Higher productivity would allow a significant increase in the potential growth rate.

"We do not see yet this phenomenon, but we are analysing very carefully the recent evolution in labour productivity," Trichet said.

He added that "the currently encouraging growth in Europe is certainly largely cyclical and it is important to see that we are currently in an environment of strong global growth, which is very encouraging."

Trichet said recent financial market corrections served as a reminder to investors of the need to price risks appropriately.

"The ECB, with all other central banks, will continue to monitor the situation very closely: smooth and orderly changes are always preferable to sharp and abrupt corrections, which are never welcome," he said.