Trichet warning that inflation could 'explode'

EUROPEAN CENTRAL Bank president Jean-Claude Trichet has warned that inflation will “explode” without a concerted effort by central banks.

The head of the Frankfurt-based bank has come under fire across the euro zone in recent days, with unions, employers and even French president Nicolas Sarkozy warning that a likely quarter-point interest rate rise to 4.25 per cent today will stunt economic growth and hit job creation.

However, Mr Trichet had a defiant reply to his critics ahead of this morning’s meeting in Frankfurt of the bank’s board of governors.

“We central banks have a big responsibility,” said Mr Trichet in yesterday’s Die Zeit newspaper. “If we’re not decisive there’s a risk of inflation exploding. If we act in a decisive way, we can master the situation.”

Analysts say the ECB is anxious to impose short-term pain to prevent worse damage in the longer term. However, a rate rise is likely to trigger market volatility, coinciding as it does with key US employment data.

Markets were volatile when, a month ago, Mr Trichet indicated that the bank would raise its key rate at today’s meeting to contain inflation in a time of slowing economic growth.

In the meantime, inflation has soared to 4 per cent, twice the ECB’s limit, thanks to rocketing energy and food prices.

The bank will also be concerned by new data from the EU statistics office yesterday showing that European producer prices jumped a record 7.1 per cent in May from a year earlier.

Politicians are concerned that higher interest rates will exacerbate the euro zone’s economic downturn.

As record oil and energy prices erode consumer purchasing power, euro zone companies have lost their competitive edge in export markets following the euro’s 16 per cent appreciation against the dollar in the last 12 months.