The President of the European Central Bank has issued a strong warning that the ECB will not hesitate to raise interest rates if wages or other prices increase in response to the recent surge in oil and food prices.
Jean-Claude Trichet noted that European inflation is now at a six-year high of 3%.
He urged social partners and price setters throughout Europe to help ensure that inflation expectation remain low.
Mr Trichet said that it is ‘absolutely important, absolutely fundamental, and essential’ that higher prices for food and energy are not allowed to result in higher demands for wages, and said he would not tolerate any second round efforts arising from the surges.
He insisted that the Governing Council of the European Central Bank, which sets interest rates, stands ready to take whatever action is required to prevent any knock-on effects on inflation.
The council, he said, would monitor all developments very closely and would act in a firm and timely manner if it sees any threat of second-round inflation increases. Mr Trichet called on all price and wage setters to exercise restraint.
Mr Trichet warned that recent economic data confirmed the existence of strong short-term upward pressure on European inflation, which stood at 3% in November. He also said that credit and borrowing levels were growing vigourously in the Euro area.
For the moment, however, the ECB has decided to hold fire on interest rates because of the continuing uncertainty associated with global financial market volatility.
Nevertheless, the ECB president said the council remains very alert and will not hesitate to raise interest rates if wage inflation increases.
