The President of the European Central Bank, Jean-Claude Trichet, 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.
Mr Trichet noted today 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.
The ECB President Jean-Claude Trichet has said that it is 'absolutely important, absolutely fundamental, and essential' that higher prices for food and energy do not allowed to result in higher demands for wages.
Mr Trichet said that the European Central Bank would not tolerate any second round effects from the recent surge in oil and food inflation.
He said 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, will monitor all developments very closely and will 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.
He said that recent economic data has 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. Euro zone interest rates remained at 4% - as expected today.
Nevertheless, the ECB president said the council remains very alert and will not hesitate to raise interest rates if wage inflation increases.
Meanwhile, the European Central Bank has cut its growth forecast for 2008 and raised its outlook for inflation. The ECB raised its euro zone growth forecast for 2007 to 2.6% from 2.5% previously but cut next year to 2% from 2.3%.
Growth in 2009 was expected to edge back up to 2.1%, the bank added.
Earlier, the Paris-based OECD think-tank warned that a strong euro and tougher credit conditions would hit the euro zone economy next year, and cut its 2008 growth forecast to 1.9% from 2.3% previously.
With risks to growth rising, the Organisation for Economic Cooperation and Development advised the ECB against raising interest rates despite high inflation.
