ECB's Trichet Says Economy May Improve After `Trough' This Year

By Simone Meier

July 18 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said the bank expects the euro-region economy to gather strength towards the end of the year after a ``trough'' in the previous six months.

``We will have a trough in the profile of growth in the euro area in the second and third quarters'' before ``a progressive return to ongoing moderate growth,'' Trichet told four newspapers in an interview published on the ECB's Web site today. Trichet said he has ``nothing to add or withdraw from'' the July 3 statement when the bank raised its key rate to 4.25 percent.

The 15-member euro region is losing momentum as record oil prices sap the spending power of companies and consumers just as a stronger euro makes exports less competitive. European economic confidence fell to the lowest in more than three years in June. Still, the ECB is concerned about companies raising prices and wages after inflation surged to a 16-year high in June.

Crude oil prices have increased 70 percent in the past year, reaching an all-time high of $147.27 a barrel on July 11.

Still, some labor unions are already pushing for more pay to compensate workers for faster inflation. Deutsche Lufthansa AG, Europe's second-largest airline, earlier this month offered German baggage handlers and cabin crews a 6.7 percent pay increase after employees staged strikes. The Frankfurt-based carrier previously offered 5.5 percent more pay.

In Germany, Europe's largest economy, producer-price inflation accelerated to the fastest pace in 26 years in June, the Federal Statistics Office in Wiesbaden said today.

`Relatively Hawkish'

Trichet in the interview reiterated that the 21-member governing council is ``never pre-committed'' to a definite rate plan and ``will do in the future what is appropriate to deliver price stability.'' The ECB aims to keep inflation just below 2 percent.

``The overall message in my view is still relatively hawkish,'' said James Nixon, an economist at Societe Generale SA in London. ``The ECB could well hike rates again even as the economy skirts falling into an outright recession.''

Investors have nevertheless scaled back bets on the ECB raising interest rates further this year, Eonia swap contracts show. The December contract is at 4.36 percent today, down from 4.55 percent on June 16. The April contract is at 4.40 percent.

``Today price setters and social partners must take into account that we will be back to price stability -- in line with our definition -- say over 18 months,'' Trichet said. The ECB has ``no further indication'' for ``future interest rates.''

The interview was published in France's Le Figaro, Ireland's Irish Times, Germany's Frankfurter Allgemeine Zeitung and Portugal's Jornal de Negocios.

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net