25th Feb 2024

Trichet highlights inflation risks for eurozone

  • Uncertainty about the prospects for growth in the eurozone remains "unusually high" (Photo: European Community)

European Central Bank (ECB) chief Jean-Claude Trichet on Wednesday (26 March) indicated he does not see the need to lower interest rates, referring to ongoing inflationary pressures posed by the risk of further rises in energy and food prices.

He said that the "current monetary policy stance" which sees interest rates at their highest in six years will help curb inflation in the 15-member eurozone.

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Mr Trichet noted that: "Risks to the medium-term outlook for inflation are on the upside. These risks include further rises in oil and agricultural prices."

The French banker also sounded a more pessimistic note on inflation than earlier this month by saying that it is expected to remain significantly above 2 percent - the ECB's ceiling - in the eurozone for most of 2008. At the moment, eurozone inflation is at a record 3.3 percent.

"The period of relatively high inflation rates will be more protracted than previously expected," he said before the European Parliament's economic and monetary affairs committee.

The ECB chief reiterated that the bank remains "inflexibly attached" to its goal of maintaining price stability. His comments come despite complaints by France among others that its exporters are being harmed by the high rate of the euro against the dollar.

The ECB has left its main rate unchanged at 4 percent since the credit market crunch in August, while the US Federal Reserve has cut its main rate six times.

Mr Trichet said it "corresponds to what we believe is necessary to achieve price stability in the medium term". He defined this as 18 to 24 months.

"If we had reduced interest rates, the moral hazard is that we would have been asking citizens to bail out the banks."

In spite of the uncertainty in global financial markets, Mr Trichet repeated his view that the fundamentals of the European economy are "sound" and that it is not suffering from major imbalances.

But he noted that while "ongoing growth" in the European economy is expected to continue, "uncertainty (…) remains unusually high."

"Downside risks relate to a potentially broader than currently expected impact of financial market developments."

The ECB chief also said he did not believe global financial turmoil, triggered by the collapse last summer of the US subprime market, had reached its nadir.

Referring to it as an "ongoing process of very significant market correction" he added "I would not say that the worst is behind us."

Mr Trichet called for a "change of culture" in the banking system to make it easier to prevent such crises in the future. "I would sum up this cultural change with two words: transparency and anti-cyclicity."

More openness would make sure all market players have a clear picture of what is happening while financial rules that tend to amplify booms and busts need to be re-examined, he said, noting that if financial institutions do not make "convincing" changes then "perhaps it is necessary to engage in regulation."

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