The European Central Bank is determined to prevent higher oil and food prices driving up inflation more broadly, President Jean-Claude Trichet said on Wednesday.
Trichet appealed to employers, employees and firms to resist the temptation to raise wages and prices in line with a current spike in consumer price inflation. The European Central Bank would not hesitate to act if needed to head off a wage-price spiral, he said, although he gave no indication that any change in Euro zone interest rates from the current 4.0% was imminent. „We are here to tell you we will not tolerate second round effects,” Trichet told the European Parliament’s Economics and Monetary Affairs Committee. Headline inflation hit its highest level in six and a half years in November at 3.1%, and Trichet said it was likely to ease only gradually next year. His remarks stuck closely to the statement made after the ECB’s last rate meeting on Dec 6 when policymakers surprised investors by discussing a rate rise before opting for no change. Economic fundamentals were still sound but growth was likely to slow to around 2% in 2008, in line with the region’s potential, with risks seen to the downside, Trichet said.
In Vienna, ECB Governing Council member Klaus Liebscher said insecurity about the economic impact of financial market turbulence would continue. „In general, the downside risks to growth forecasts have increased,” he told a news conference. Trichet said the ECB’s credibility in fighting inflation would help to ensure that what should be a temporary rise in inflation caused by higher commodity prices is not reflected in higher wage demands and consumer goods price rises. But the ECB would take more concrete action if needed. „By acting in a firm and timely manner on the basis of its assessment, the Governing Council will ensure that such second-round effects and risks to price stability over the medium term do not materialize,” Trichet said. He declined to elaborate when asked about a possible cut in euro zone interest rates but said their current level was correct. „The Governing Council considered that we had to remain totally alert and I communicated in this direction that the level of interest rates was in line, taking into account this permanent alertness, ... with the delivery of price stability in the medium run,” he said.
Indexation „very bad”
The ECB has long warned about the risk that rises in administered prices and hefty wage demands pose to inflation. Stepping up this rhetoric, Trichet said in an environment of continued uncertainty about the economic impact of financial market turbulence, automatic increases in wages and prices were a „very bad thing”. „Indexation guarantees second-round effects, it is precisely what we want to avoid,” he said. Belgian wages are tied to inflation and workers in Luxembourg also expect a wage rise next year due to high oil prices, although there was no automatic rise in 2007. In Spain, most private sector workers, or about a third of the workforce, receive an extra rise if end-year inflation exceeds 2%. Trichet drew a clear line between monetary policy and action to ease tight liquidity in money markets due to financial market fallout from the US subprime mortgage crisis.
The US subprime mortgage crisis has not reduced Eurozone banks’ lending to households, and a likely US economic growth slowdown should be partly offset by strength in emerging markets, he said. In the Eurozone, housing markets appeared to be cooling after a long period of unusually high growth rates in many countries, although price growth remained relatively buoyant. „The outlook for the euro-area as a whole remains that of a soft landing, as price increases moderate gradually and further developments evolve in line with fundamentals,” he said. „Within this context, a continued moderation of residential investment would also be likely. „ Trichet welcomed suggestions made by the US Federal Reserve on Tuesday on tightening mortgage lending rules, and defended coordinated central bank action to inject liquidity into money markets to relieve year-end funding tensions. (Guardian)