AFP
ECB's Trichet warns again on inflation, high energy prices
Friday May 9, 2008, 12:12 pm
ATHENS (AFP) - European Central Bank chief Jean-Claude Trichet warns that inflation is a serious problem for the 15-nation eurozone and says people should get used to higher energy prices.
"As we have said on previous occasions, inflation rates are expected to remain high for a rather protracted period of time," Trichet stressed Thursday after ECB governors left the bank's benchmark lending rate at 4.0 percent.
Asked here if there were ways to offset the impact of soaring energy and food prices -- which some economists say represent a transfer of wealth back to countries supplying raw materials for the rest of the planet -- he said no.
"We don't call for an exceptional offsetting of some of the increases because in most cases this corresponds to a retransfer and we have to accept that," Trichet said.
Oil prices which hit a new peak near 124 dollars on Wednesday have edged lower since then, but along with a credit squeeze they are crimping activity around the world.
An ECB banking survey to be released Friday showed that credit conditions on loans to eurozone companies had tightened further in early 2008, the central banker added.
Trichet said the survey showed that a net 49 percent of banks tightened standards on lending to companies in the first quarter, and that a net 33 percent of banks tightened credit standards on loans for house purchases.
Both the ECB and the Bank of England left benchmark lending rates unchanged Thursday after policymakers deemed that inflation risks outweighed those posed by weaker economic growth.
The BoE left Britain's rate at 5.0 percent during a meeting in London.
Trichet reminded reporters in Athens that eurozone inflation has "remained above 3.0 percent for the past six months," mainly owing to higher energy and food prices, well above the ECB's target of just below two percent.
The ECB has left its key lending rate unchanged for almost a year, while the US Federal Reserve has slashed its rate to 2.0 percent and the Bank of England has begun to gradually lower the cost of borrowing in Britain.
The sharply contrasting Fed and ECB stances helped push the euro to record highs against the dollar last month, making eurozone exports more expensive on global markets.
Many analysts expect that once inflation eases and compelling evidence of an economic slowdown appears, the ECB will begin to trim its interest rates.
On growth, Trichet said that while business activity would slow this year, the euro area economy stood on a "sound" foundation, while adding that uncertainty surrounding the outlook remained high.
UniCredit chief economist Marco Annunziata said Thursday: "It will still take a while, and additional data, for the ECB and forex markets to accept that the trend in eurozone growth and rates has changed, but I think today's press conference gave the first, tiniest hint in that direction."
Such views, along with hopes the US economy was turning the corner, have helped the dollar begin to battle back against the euro.
The single currency traded for 1.5393 dollars late Thursday in New York, well below its April peak above 1.60 dollars.
Commerzbank chief economist Joerg Kraemer felt however that "Trichet emphasized the inflation problem a bit more" in Athens.
"In contrast to the majority of economists we do not expect that the ECB will cut rates" this year, he said.
Holger Schmieding at Bank of America was among those who noted the dollar's timid recovery amid US economic news that was less dismal than many had feared.
"If this 'global healing' process, which is still very tentative at this stage, gathers pace over coming months, the case for the ECB to follow the Fed and the BoE eventually with rate cuts would get much weaker," he said.
Trichet acknowledged "elements that are in some respects encouraging and seem to show that a number of markets are going progressively more back to normal."
But, he cautioned: "It is not unanimous. It is not all the markets."
The ECB governing council gathered here as part of its policy of meeting twice a year in a eurozone capital, and was hosted by Greek central bank governor Nicholas Garganas who is to step down when his term expires in June.
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