ECB's Trichet warns again on inflation, high energy prices

By William Ickes AFP - Thursday, May 8 05:27 pm

ATHENS (AFP) - European Central Bank chief Jean-Claude Trichet stressed again Thursday that inflation was a longer term problem for the 15-nation eurozone and said 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 said here after ECB governors left the bank's benchmark lending rate at 4.0 percent.

Asked 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.

He repeated warnings that previous attempts to offset 1970s oil price shocks by raising wages had fueled inflation and caused mass unemployment in Europe.

Countries which recognized and accepted then that low energy prices were a thing of the past fared better than those which sought ways of compensating for the increases, the central banker has said previously.

Both the ECB and the Bank of England left benchmark lending rates unchanged Thursday after policymakers deemed that inflation risks outweighed those posed by weakening economic growth.

The BoE left Britain's rate at 5.0 percent during a meeting in London.

Trichet told the news conference in Athens: "Inflation rates have risen significantly since the autumn, owing mainly to increases in energy and food prices."

Recent data put eurozone inflation at 3.3 percent in April -- well above the ECB's target of just below two percent.

On growth, Trichet said that while economic growth would will slow this year, the euro area sat on a "sound" foundation, adding, however: "The uncertainty surrounding this outlook for economic growth remains high."

The central bank chief also underscored the "potential for the financial market turbulence to have a more negative impact on the real economy than previously anticipated."

ECB governors have kept their key lending rate unchanged since June last year even as the US Federal Reserve slashed its rate to 2.0 percent and the Bank of England gradually lowered the cost of borrowing.

The 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 and sparking renewed criticism of the ECB in some quarters.

Oil prices which hit a new peak near 124 dollars on Wednesday have also crimped economic activity worldwide.

Many analysts, however, expect that once inflation comes off the boil and compelling evidence of an economic slowdown appears, the ECB will begin to trim interest rates.

At UniCredit Markets, Aurelio Maccario said Trichet's comments suggested the ECB would begin to consider rate cuts "once it will become clearer that the eurozone will not be immune -- though to a (lesser) extent -- from the slowdown other economic areas are currently experiencing."

Such views, along with hopes the US economy was turning the corner, have helped the dollar begun to recover against the euro.

The single currency traded Thursday at 1.5340 dollars, well below its April peak above 1.60 dollars.

But Commerzbank chief economist Joerg Kraemer felt that "if anything, president 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.

The ECB governing council met in Athens as part of its policy of meeting twice a year in a eurozone capital, hosted by Greek central bank governor Nicholas Garganas who is to step down when his term expires in June.

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