ECB chief sees no reason to reduce interest rates

THE EUROPEAN central Bank (ECB) chief Jean-Claude Trichet yesterday indicated that he does not see the need to reduce interest rates, referred to ongoing inflationary pressures posed by the risk of further rises in energy and food prices.

While stressing that the "current monetary policy stance" will help curb inflation in the 15-member euro zone, Mr Trichet noted: "Risks to the medium-term outlook for inflation are on the upside. These risks include further rises in oil and agricultural prices." The French banker also sounded a more pessimistic note on inflation than earlier this month by saying that it is expected to remain significantly above 2 per cent in the euro zone for most of 2008.

"The period of relatively high inflation rates will be more protracted than previously expected," he said before the European Parliament's economic and monetary affairs committee.

Euro zone inflation is at a record 3.3 per cent, although the ECB targets a ceiling of 2 per cent.

Countering questions from several MEPs about the wisdom of the bank's monetary policy - it has left its main rate unchanged at 4 per cent since the credit market crunch in August, while the US Federal Reserve has cuts its main rate six times - Mr Trichet said it "corresponds to what we believe is necessary to achieve price stability in the medium-term".

"If we had reduced interest rates, the moral hazard is that we would have been asking citizens to bail out the banks."

In spite of the uncertainty in global financial markets, he repeated his view that the fundamentals of the European economy are "sound" and that it is not suffering from major imbalances.

But he noted that while "ongoing growth" in the European economy is expected to continue, "uncertainty . . . remains unusually high". "Downside risks relate to a potentially broader than currently expected impact of financial market developments."

The ECB chief also said he did not believe global financial turmoil, triggered by the collapse last summer of the US subprime market, had reached its nadir. Referring to it has an "ongoing process of very significant market correction", he added: "I would not say that the worst is behind us."

He called for a "change of culture" in banking to make it easier to prevent such crises in the future. "I would sum up this cultural change with two words: transparency and anti-cyclicity."