Tags: Trichet Inflation Risks Warrant ‘Very Close Monitoring’

Trichet: Inflation Risks Warrant ‘Very Close Monitoring’

Thursday, 03 Feb 2011 09:04 AM

Inflation is likely to climb further and could exceed the European Central Bank's target for most of the year but poses no threat yet to medium-term price stability, President Jean-Claude Trichet said on Thursday.

Euro zone inflation accelerated to 2.4 percent last month, moving further above the ECB's target of just below 2 percent.

Trichet said it would be above 2 percent for most of 2011.

"We continue to see evidence of short-term upward pressures on overall inflation, mainly owing to energy and commodity prices,'' he told a news conference after the bank kept interest rates at a record low of 1 percent for the 22nd month running.

"This has not so far affected our assessment that price developments will remain in line with price stability over the policy relevant horizon. At the same time, very close monitoring is warranted,'' he said, adding that risks could move to the upside.

The euro extended losses against the dollar as markets focused on the ECB's view that inflation expectations remained firmly anchored, dipping sharply to 1.3662 by 1402 GMT compared with around 1.375 when Trichet's news conference began.

"The underlying message is that there is no need for a rate hike anytime soon,'' said Boris Schlossberg, director of currency research at GFT in New York.

Trichet's comments were in line with last month, when he toughened ECB language on inflation dangers, saying price risks, while still broadly balanced, could move to the upside.

"We are very much in line with the judgment, the assessment, that we had last month,'' he said.

Financial markets have been bringing forward rate hike expectations.

Nevertheless, analysts believe the sharpened tone was more about communicating the ECB's commitment than preparing markets for a hike soon.

Along with rising headline inflation, there are signs of upward pressure in the pipeline — producer prices rose more than expected in December, boosted mainly by a jump in energy costs.

Passing Prices On

Of crucial importance will be how much of the import price increases seep into domestic prices through higher wages.

As long as energy and food prices do not lead to second round inflationary effects, there is no need for the ECB to react with rate increases, a German government advisor said this week.

The euro's recent rise against the dollar has worked in the ECB's favor.

It rose more than 5 percent versus the dollar between the January and February rate meetings, bolstered by growing expectations that the ECB will be well ahead of its U.S. counterpart in raising rates.

With the bulk of euro zone inflation coming from imports, the rising euro should weaken inflationary pressures.

Trichet also said the ECB's government bond buying program to prop up the debt of weaker euro zone members was ``ongoing.''

The ECB halted its bond purchases for the first time since October last week, reflecting a calmer recent tone to debt markets and amid growing talk about the euro zone's rescue fund, the EFSF, taking over the role in future.

Reiterating the stance of previous comments, Trichet said the rescue fund should be "as flexible as possible (and) ... as effective as possible in terms of magnitude."

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Inflation is likely to climb further and could exceed the European Central Bank's target for most of the year but poses no threat yet to medium-term price stability, President Jean-Claude Trichet said on Thursday. Euro zone inflation accelerated to 2.4 percent last month,...
Trichet Inflation Risks Warrant ‘Very Close Monitoring’
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2011-04-03
 

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