Trichet Says Market Turmoil May Have Broader Impact (Update1)
04/10/2008
By Christian Vits
April 10 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said inflation risks remain elevated even as the credit squeeze threatens economic growth more than the bank forecast, suggesting it won't change interest rates any time soon.
``We are experiencing a rather protracted period of temporarily high annual rates of inflation,'' Trichet said at a press conference in Frankfurt today after the ECB kept its key rate at 4 percent. Financial-market ``tension may last longer than initially thought and have a broader than currently expected impact on the real economy,'' he said.
With inflation running at the fastest pace in almost 16 years, the ECB is reluctant to follow the U.S. Federal Reserve and Bank of England in lowering interest rates to shore up economic expansion. At the same time, record oil prices, higher credit costs and the euro's 18 percent gain against the dollar in the past year are threatening to slow growth in the 15 euro nations.
``We believe that the current monetary policy stance will contribute'' to keeping inflation under control, Trichet said. ``The firm anchoring of medium- to longer-term inflation expectations is of the highest priority.''
The euro pared gains against the dollar, falling from a record, after Trichet mentioned the financial-market turmoil may drag on longer than anticipated. The euro traded at $1.5843 as of 1.59 p.m. in London, compared with $1.5831 yesterday, after rising to an all-time high of $1.5913 earlier.
Record defaults on loans to U.S. households with poor credit histories have caused a global credit squeeze for almost eight months. The International Monetary Fund said this week there's a 25 percent chance of a world recession. It estimates losses stemming from the worst financial crisis in the U.S. ``since the Great Depression'' may approach $1 trillion.
``The level of uncertainty resulting from the turmoil in financial markets remains unusually high,'' Trichet said.