ECB Trichet: Until Now, Inflation Expectations Stable
By Brenda Cronin and Michael S. Derby, Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- The European Central Bank's leader on Monday said his institution raised interest rates to prevent inflation from taking hold in the euro zone, and he said Greece's austerity plan should be followed to its completion.
The ECB is "trying to deliver price stability in the medium term" and interest rates were lifted at the last policy meeting "precisely to be sure" that this will happen, central bank President Jean-Claude Trichet said Monday in an interview with The Wall Street Journal.
"Until now [inflation expectations] have been very well anchored," Trichet said. "We will not accept second-round effects" of inflation in the euro zone, and "until now, I do not see alarming second-round effects," he said, although he added: "There are some signs here and there that are not going in the right direction."
When it comes to inflation, "we have to remain alert, and we are," Trichet said.
Early in April, the ECB became the first monetary authority in a major developed economy to raised interest rates for the first time since the global financial crisis unfolded in 2008. At their most recent meeting, ECB policymakers voted unanimously to raise rates a quarter-percentage point, to 1.25%. The Federal Reserve and the Bank of England have yet to raise rates from the extraordinarily low levels that have prevailed since the recession. The widespread expectation is that the Fed is unlikely to lift rates before late 2011 or early next year.
The early-April rate increase followed months of signals from Trichet and ECB policymakers that inflation was increasingly a concern. The ECB, which has a mandate to maintain price stability among the 17-nation currency zone, has a medium-term inflation target just shy of 2%.
On Friday, the currency bloc reported that inflation in March rose by 1.4%, the largest one-month increase ever, bringing the annual inflation rate to 2.7% in March from 2.4% in February. A notable aspect of the March report was an increase, to 1.3% from 1%, in the level of core inflation, indicating that higher prices are seeping in beyond food and energy.
The ECB's tightening, which saw the euro surge to a 15-month high last week, is likely to be painful for the weaker economies at the bloc's periphery. Greece, Ireland and, most recently, Portugal have received bailouts and Spain, struggling with more than 20% unemployment and a dim outlook for growth, is seen at risk of needing assistance. Spanish Economy Minister Elena Salgado has said that a bailout of Europe's fourth-largest economy "is absolutely ruled out."
The central banker's remarks came after weekend meetings in Washington among the International Monetary Fund, the World Bank and the Group of 20 developing and industrialized nations.
On the primary focus of the meetings--establishing a framework to right global economic imbalances--Trichet said the idea that something must be done to create greater financial harmony "is more and more recognized by all of us."