ECB will ‘remain alert’ to risk of inflation
Jean-Claude Trichet, the president of the European Central Bank (ECB), today said that the bank’s interest rate was appropriate, but that “very close monitoring” was warranted.
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Trichet was speaking in Frankfurt after the ECB announced that it was keeping its headline interest rate on hold at 1%, the 21st month without a change.
He said that although the annual eurozone inflation rate had risen to 2.4% in January, the ECB was convinced that “price developments will remain in line with price stability”. He said that the ECB would “remain alert” to the risk of inflation. “Very close monitoring is warranted,” he said.
The ECB’s mandate is to maintain annual eurozone inflation at or close to 2% over the medium term. Recent inflation rate rises have increased speculation that the ECB will raise interest rates.
Trichet said that there was “short-term upward pressure on overall inflation” owing to energy and commodity prices. He said that while there might be a “hump” from time to time, what counted was that the bank delivered an inflation rate “in the medium term less than or 2% close to 2%”.
“We will continue to do that with great determination without being tied to pre-commitment,” he added.
The ECB president said that the increase in the eurozone inflation rate in January had been “broadly anticipated”. Inflation rates could temporarily increase further and were likely to stay at slightly above 2% for most of 2011, he said.
Trichet said that recent data confirmed “the positive underlying momentum of economic activity in the eurozone”. Eurozone exports should benefit from the recovery in the world economy, he said, while the high level of business confidence in the eurozone could “provide more support to economic activity” than expected.
Risks for the economy included tensions in some parts of the financial markets, recent increases in oil and other commodity prices, and protectionist measures.
Trichet stressed that governments should “fully implement their fiscal consolidation plans” in 2011 to improve prospects for growth and job creation. He called on countries to carry out “substantial and far-reaching structural reforms”, especially those countries that had lost competitiveness or were suffering from high fiscal and external deficits.
He denied that the ECB was putting a stronger emphasis on structural reform measures than before, saying that the bank had been urging eurozone countries to carry out reforms before the economic crisis started.
Asked to comment on a recent halt to the ECB’s programme of buying eurozone bonds to provide liquidity, Trichet said that the bank had “not intervened for five days” but stressed that the programme was “ongoing”. Asked whether the ECB wanted the eurozone rescue fund, the European Financial Stability Facility, to take over from the ECB in buying bonds, he repeated comments made in previous months that the bank was calling for “the utilisation of the present stabilisation fund to be as flexible as possible”.
Irish bail-out terms
Trichet was asked several times whether Ireland might be able to renegotiate the terms of its €67.5 billion bail-out package from the eurozone and the International Monetary Fund (IMF) as some Irish opposition politicians are requesting. “Implementation [of the programme] is essential in the opinion of the ECB for the credibility of the country,” Trichet said, adding that the bail-out package had been agreed with the EU and the IMF.
Replying to a question about whether holders of Irish bank debt might be asked to take losses as part of a renegotiation of Ireland’s bail-out, Trichet said: “The plan has been approved by the European Commission in liaison with the ECB. Let’s apply the plan.”