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ECB chief appeals for price, wage restraint, signals no rate cut soon.
The head of the European Central Bank, Jean Claude Trichet, pictured on April 4, appealed for price and wage restraint Thursday, recalling "mass unemployment" after pay hikes years ago and signalling no change in ECB interest rates any time soon.
The head of the European Central Bank, Jean Claude Trichet, appealed for price and wage restraint Thursday, recalling "mass unemployment" after pay hikes years ago and signalling no change in ECB interest rates any time soon.
"There is certainly no room for complacency in this regard," he warned after forecasting "a rather protracted period of temporarily high annual rates of inflation" in the 15-nation eurozone.
Trichet spoke after the ECB left its main lending rate at 4.0 percent to strike a balance in dealing with strong inflation and slowing growth.
But he made it clear the bank's number one objective would be to combat inflation, which would not only ensure price stability but would also "create the conditions for job creation, for sustainable growth ... and also calm down financial markets."
The ECB stressed that its "current monetary policy stance will contribute to achieving ... our primary objective (of) maintaining price stability in the medium term."
"This reference," said Bank of America analyst Holger Schmieding, "clearly points to stable rates for the foreseeable future."
Trichet pressed trade unions and businesses to refrain from calling for excessively high wage increases and from raising prices further, moves the bank terms second round effects in contrast to the first round of food and energy price hikes.
"The second round effects that we observed in the first and second oil shocks created mass unemployment in Europe," Trichet explained in reference to surges in oil prices in the 1970s.
The bank was now "strongly committed to preventing second round effects" and considered the solid grounding of inflation expectations as its highest priority, he added following the governing council's unanimous decision.
Eurozone inflation hit a 16-year high of 3.5 percent in March, and ECB officials have stressed the need to counter expectations that prices would climb still higher.
Once households and businesses conclude that prices will continue to rise they begin to anticipate the spiral and thereby add to it.
The ECB expected inflation to stay "significantly" above its target of just below 2.0 percent in the coming months and only moderate gradually later in 2008, he added.
Before the European bank announced its decision, the Bank of England had cut its key interest rate by a quarter of a point to 5.0 percent in response to a global credit squeeze.
The ECB has now left its benchmark refinancing rate unchanged since June, while the US Federal Reserve has slashed its Fed funds rate from 5.25 to 2.25 percent since September to try and prevent a US recession.
As a result, the euro stayed within spitting distance of record highs against the dollar and pound on Thursday after setting a new all-time peak of 1.5912 against the US currency.
Addressing concerns about slower growth in a region of 320 million people, Trichet said the eurozone's economic fundamentals were "sound," with data continuing to point to moderate but ongoing economic expansion.
"However, the level of uncertainty resulting from the turmoil in financial markets remains unusually high and tensions may last longer than initially expected," he acknowledged.
Economic activity has been hampered by financial turbulence, the euro's rise against other major currencies and high energy prices.
On Wednesday, oil prices hit a record peak of 112.21 dollars per barrel in New York.
Bank of American analyst Schmieding has nonetheless predicted there will be no rate cut by the ECB before September, in part owing to a recent German public sector wage agreement that was a clear example of the bank's second-round fears.
Labour strikes for higher pay have increased in many of the European Union's 27 member countries as consumers are squeezed by rising gas, electricity and mortgage bills, and rocketing food prices in staples such as bread, eggs and dairy goods.
But the ECB chief's comment on complacency "definitely dismisses any possibility of a near-term rate cut also because Trichet made it clear that the recent jump in inflation was not expected, at least not at current levels," said Aurelio Maccario of UniCredit Markets.
? 2008 AFP
10/04/2008 16:48:28 UST
King: Big rate cuts? Forget it
He said he understood why people were worried about recent surges in the cost of food and energy.
But he insisted these were just short-term ?adjustments?.
He said he was more concerned about fears of rising inflation leading to big wage demands ? pushing inflation higher still ? than he was about the possibility of a UK recession.
Mr King admitted it was ?more likely than not? that inflation will over or undershoot its target over the next ?couple of years? ? forcing him to write another letter of explanation to the Chancellor.
He added: ?It?s perfectly reasonable to believe that, over the next few months, inflation will rise. But I ask people to distinguish between short-term rises ? this one-off adjustment ? from the fact that we are determined to bring inflation back to target over the medium term.?
He said there was ?no obvious reason? to expect repeats of the recent sharp increases in food and energy prices.
The Governor also urged workers to show restraint in wage talks. He said: ?This higher level of prices is a genuine reduction in our standard of living and we must all face that. But that?s not something we can offset by just demanding higher wages ? because that leads to higher inflation.?
Mr King added: ?We think these increases are temporary and unlikely to recur. If they don?t recur, inflation will fall back. We have a track record and hope you will believe us when we say we are taking the long view.?
Unveiling the Bank?s latest quarterly inflation report, the Governor also urged people to ignore ?lurid headlines? on the economy.
He said: ?Once you get away from London and the City, the mood music is very different. It?s not the doom and gloom you get from people working in property and in financial services. Sentiment is by no means as negative elsewhere.
?Don?t be taken in by too many of the analysts whose views are coloured by the environment, financial services, in which they work.?
Mr King said he was unsurprised banks had not passed on all recent interest rate cuts to mortgage borrowers.
He added: ?In the three years to last summer, despite the fact that we were raising rates, mortgage rates did not rise as fast.
?Now the market is adjusting back to normal and so it wouldn?t be surprising if the full extent of rate cuts were not passed on.?
Alan Clarke, economist at investment bank BNP PARIBAS, said: ?The key signal is that the door is still wide open to rate cuts ? but the Bank is unhappy with the extent of rate cuts being priced in by the market.?
NUCLEAR power firm BRITISH ENERGY made pre-tax profits of ?192million from October to December, down from ?293million a year earlier. But the shares rose 44p to 533 on a better than expected dividend.
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