The European Central Bank is worried about inflation in the euro zone and stands ready to take measures if necessary, ECB president Jean-Claude Trichet said today.
Inflation risks are clearly orientated higher, Trichet told lawmakers at the European Parliament in Brussels, and the ECB was ready to counter such pressure, which it would normally do by raising interest rates.
The ECB's main interest rate currently stands at 4%. The central bank has set an upper target for inflation of 2%. But euro zone inflation hit 3.1% in November, the highest level for six and a half years owing to rising costs of energy and food products.
Trichet warned that the period of temporarily high rates of inflation would be somewhat more protracted than previously expected.
He added however that a greater threat was posed by the possibility of other prices and wages increasing as a result, creating a so-called second-round effect, as people were squeezed by higher retail prices. 'If we had second-round effects then we would be in a totally different universe,' Trichet said.
Meanwhile, Trichet drew a clear distinction between monetary policy as defined by its level of interest rates, and operations on the money markets, where the bank has been exceptionally active in the past week.
The ECB yesterday gave its biggest single injection of cash ever, providing almost €350 billion over two weeks to help banks get through a crunch created by customer cash demands and bookeeping requirements at the end of the year.
'We are totally separating what we do as regards the monetary policy stance ... and what we do on the money market,' Trichet stressed.
Even as the ECB lends extra amounts of cash to banks for two weeks or three months, it carefully siphons off surplus liquidity in the very short term to avoid cash build-ups that could fuel inflation.
