By Ralph Atkins in Frankfurt
December 23 2007
SourceA drive to keep a lid on inflation means the European Central Bank will not be distracted by the repeated interest rate cuts of its US and UK counterparts, according to Jean-Claude Trichet, the bank’s president.
The ECB has held eurozone rates at 4 per cent since June, and the US Federal Reserve cut rates three times in the same period to 4.25 per cent. The Bank of England this month made what is expected to be the first of several cuts, reducing rates by 25 basis points to 5.5 per cent.
“Other colleagues are in a different situation,” Mr Trichet told the Financial Times in an interview. With eurozone inflation at a six-year high of 3.1 per cent, he confirmed some members of the ECB’s governing council supported raising interest rates at their last meeting on December 6.
What would be “decisive” for the central bank, Mr Trichet said, was whether the surge in inflation became longer-lasting via “second-round effects”, for example feeding through into eurozone wage demands. “I was very clear on behalf of the governing council; we would not let those second-round effects materialise,” he said.
The Frankfurt-based ECB aims to keep annual inflation “below, but close” to 2 per cent. But Mr Trichet stressed that central banks were liaising on measures to ease the global credit squeeze.
The interview took place on December 13 – the day after the ECB joined other central banks in unveiling measures to alleviate market tensions.
Mr Trichet’s selection by the Financial Times as “Person of the Year” reflects the plaudits he has won for his handling of the financial crisis since August – when the ECB took the lead in injecting large amounts of liquidity into markets. Last week, it again took markets aback by injecting almost €350bn ($502bn) in two-week money – a move that appeared to calm banks’ fears about a year-end funding crisis.
A striking feature of this year’s events compared with previous crises, Mr Trichet said, was that they were affecting industrialised economies but were “not touching the emerging world, and that is really something”. However, he played down the possibility of a big macroeconomic effect on the eurozone next year. “It is not our baseline scenario”, although the “risks were on the downside”, he said.
The ECB president warned against reaching “hasty conclusions” from the latest crisis and said the “originate and distribute” model of banking – where loans are repackaged and sold on to investors – “cannot be considered to be without defects”. Financial markets and policymakers “have to be . . . bold in accepting that things have to be improved in all domains”.
But Mr Trichet argued that risks were inevitable in a market economy. “The only economy I know that had no risks was the Soviet Union and finally, as everybody remembers, it collapsed.” It would be totally wrong “to say, now we want to eliminate creativity”.
Copyright The Financial Times Limited 2007