Brussels, 25/06/2008 (Agence Europe) - Inflation in the eurozone will remain high before falling slightly in 2009, explained the president of the European Central Bank (ECB), Jean-Claude Trichet, on Wednesday 25 June 2008. His department is forecasting that prices will rise by between 3.2% and 3.6% in 2008 and by between 1.8% and 3% in 2009. This is not satisfactory and it is worrying that the current rates risk affecting the expectations of economic players, Trichet told the European Parliament's economic and monetary affairs committee. This has accentuated the mid-term risks a little more and put the ECB in a situation of strengthened alert, he said, adding that this meant that it was imperative that all parties contributed to avoiding the appearance of second round effects, by which he meant the social partners (employers and trade unions) as well as companies. Trichet confirmed his comments from the most recent meeting of the ECB Governing Council (see EUROPE 9676), saying again that a rise in interest rates was 'possible' on 3 July 2008 but if the ECB did raise interest rates, this would not necessarily be the first in a series of rate rises.
It is clear that what we are seeing on the food and oil markets is a mixture of very active demand (which we underestimated at the beginning) weaker supply and also elements that are not necessarily speculation as such, but rather the reallocation of global portfolios to food and oil, explained Trichet. While it is difficult to separate out these various factors, he said he was not sure that speculation was the main culprit, but he did argue for better functioning of the markets and greater transparency. The ECB is not complacent at all about people taking advantage of lack of transparency on the markets, he added, but warned that one sometimes talked about speculators when there were other factors giving rise to anomalies, like lack of competition among the various economic players.
More generally, the ECB has no immediate control over imported inflation (the current hikes in food and oil prices originate from outside the eurozone), but it can influence the medium-term inflation that this generates. This should allow a return to price stability, explained Trichet, once these “bumps” have petered out, therefore justifying the constant calls for second round effects to be avoided (in other words to avoid the rising oil prices leading to increased pay rises and this in turn leading to spiralling inflation). (A.B./transl. fl)