European Central Bank President Jean- Claude Trichet said it was necessary to increase the benchmark interest rate yesterday to counter inflation risks “at the present moment.''
“We have no direct impact on the price of oil, iron ore or coal,'' Trichet said in an interview with Dutch television channel RTLZ, recorded yesterday and broadcast today. “But we have an impact on the price increases for which the economic agents in Europe are responsible. And that's why we need to prevent the second-round effects,'' in which accelerating inflation feeds into salary demands and threatens a wage-price spiral.
The ECB, which raised its benchmark rate to 4.25 percent yesterday, is weighing the risk that higher borrowing costs will exacerbate an economic slowdown against the danger that the fastest inflation in 16 years will erode consumers' spending power. Euro-area inflation accelerated to 4 percent in June from 3.7 percent in May.
Workers at Deutsche Lufthansa AG, Europe's second-biggest airline, this week staged a strike demanding a pay increase of 9.8 percent for 48,000 German flight attendants and ground crew, forcing the airline to cancel or delay flights.
Trichet yesterday played down prospects of interest-rate increases, saying this week's quarter-point boost will help bring inflation back below 2 percent. Trichet said he had “no bias'' on further rate moves.
`Inflationary Risk'
“We trust that it was necessary to decide to increase rates by 25 basis points in order to counter the inflationary risk we see at the present moment,'' Trichet said in the television interview instant payday loan. “We trust that by this move we are contributing to delivering price stability in the medium run.''
Trichet said economic growth in the euro region can improve in the last three months of the year after a slower expansion in the second and third quarters. “The second quarter was much less flattering than the first,'' Trichet said. He added that the risks to the expansion are “clearly on the downside.''
Financial markets are in an “ongoing process of very significant market corrections,'' with “episodes of high-level tensions from time to time,'' Trichet said.
Trichet said the Dutch government shouldn't raise taxes further because that may feed inflation. “If there are new decisions of that kind, it's obviously a risk to price stability,'' he said, adding that “the decisions that have already been taken are in our own projections.''
The Dutch government plans to raise the value-added tax next year to 20 percent from 19 percent. Inflation is expected to accelerate in July as utilities raise tariffs and the government steps up diesel taxes and imposes a levy of up to 45 euros ($71) per airline ticket.
Source