Brussels, 21/11/2005 (Agence Europe) - Addressing often perplexed members of the European Parliament's Economic and Monetary Affairs Committee on Monday, Jean-Claude Trichet, President of the European Central Bank, explained why he felt the time had come to raise interest rates in the eurozone. The idea was first mooted at the ECB Governing Council's meeting in Athens and mentioned by Jean-Claude Trichet in a speech at a conference in Frankfurt (the financial centre of Germany) on Friday, and Trichet described it to MEPs as being essential to establish price stability. Trichet said it was no good waiting for inflation to materialise before taking action, responding to MEPs, nearly all of whom expressed concern about the impact of raising interest rates on the tender shoots of economic growth.
Economic activity is gradually growing but is still subject to risk, from the high oil prices and faltering consumer demand, said Trichet, adding that 'recent increases, mainly in energy prices, have pushed headline inflation rates to levels significantly in excess of 2% and along a path higher than previously expected… It is likely that HICP inflation will remain elevated in the short term… markets expect oil prices to remain at historically high levels, driven mainly by buoyant global demand and also, to some extent, by fragilities on the supply side. This suggests that the impact of energy prices on overall price developments may be more lasting than in the past.' Trichet listed ongoing uncertainties 'on account of higher oil prices being passed on to consumers via the domestic production chain, and potential second-round effects in wage and price-setting behaviour. In addition, possible further increases in administered prices and indirect taxes have to be taken into account.' 'After two and a half years of maintaining interest rates at a level historically exceptionally low, I would consider that the Governing Council is ready to take a decision to move interest rates, and to moderately augment the present level of ECB rates in order to take into account the level of risks to price stability that have been identified…This move would … contribute to sustainable growth and job creation in the euro area.'
On fiscal policy, Trichet pointed out: 'No significant progress has been made in fiscal consolidation, and the outlook for countries with excessive deficits is a matter for great concern.' Refusing to name names, Trichet said that countries had to make correcting excess budget deficits and respect of the Stability and Growth Pact an absolute priority. Dutch ADLE MEP Sophia In't Veld said she would have preferred stronger words here. Responding to CSU MEP Alexander Radwan's questions about the impact of increased interest rates on national budgets, Trichet said Member States' budget policy and reform actions correlated the ECB' mandate in its search for confidence.
Cristobal Montoro Romero (EPP-ED, Spain), followed by Gunnar Hokmark (EPP-ED, Sweden) said the announced rate rise was 'sad news', but Trichet said there were several signs of increased risk and it was the ECB's duty to take preventative measures. Answering a question from Ieke Van den Burg about how to encourage greater consumer confidence, Trichet said business leaders should send out encouraging messages, adding that the ECB was not completely happy with the level of investment, saying the time had come to invest and there were plenty of opportunities. He said he was prepared to appeal to economic institutions like banks to help Europe with its growth and job creation potential. In response to Dariusz Rosati (PES, Poland), Trichet said he had every reason to believe there would be an increase in the ECB's inflation forecasts from September, explaining that oil prices alone would mean the forecasts would have to be revised upwards. (The ECB will be publishing new forecast at the next Governing Council meeting on interest rates on 1 December.) He reiterated that it would be too late to react once inflation has already set in. Queried by Irish UEN MEP Eion Ryan about the ECB's decision in the future, Trichet said it should not be assumed that a series of rate rises was necessarily on the cards.
'Isn't it too soon?' asked Greek EPP-ED MEP Antonis Samaris, clearly unconvinced by Trichet's arguments, with which he fundamentally disagreed. The President of the European Parliament Committee, French Socialist Pervenche Beres also expressed concern about the timing of a rate rise, calling for a monetary policy to accompany the consolidation of growth. Trichet responded vehemently that the ECB had been proactive and had always said that if action had to be taken, it would go ahead and act. He seemed almost weary as he asked for a little trust, explaining that the ECB had achieved the unthinkable in terms of credibility and low interest rates.