Trichet Focused on Inflation Even as Growth Slows

By Fergal O'Brien

Sept. 4 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said the central bank remains focused on fighting inflation even after cutting its economic growth forecasts for this year and next.

``Upside risks to price stability prevail,'' Trichet told reporters in Frankfurt today after keeping the benchmark rate at 4.25 percent, a seven-year high. ``We're resolute in our determination to keep inflation expectations in line with price stability.''

The ECB, which raised rates in July, wants to prevent a wage- price spiral as workers demand compensation for higher food and energy costs that pushed inflation to a 16-year high. While the economy contracted in the second quarter as consumer spending, investment and exports fell, ECB council members Axel Weber and Lucas Papademos said last week another rate increase may be necessary if the inflation outlook deteriorates.

``The uncertainty surrounding this outlook for economic activity is particularly high at the current juncture,'' Trichet said. ``Downside risks prevail'' and risks stem from the potential impact on investment and consumer spending from higher prices, he said.

The ECB today lowered its 2008 economic growth forecast to about 1.4 percent from 1.8 percent and its 2009 prediction to 1.2 percent from 1.5 percent. It raised the inflation forecast for this year and next to about 3.5 percent and 2.6 percent from 3.4 percent and 2.4 percent respectively.

The ECB forecasts for growth and inflation are staff projections and are published as a range around a mid-point. Trichet said the Governing Council does not ``underwrite'' the forecasts.

While crude oil prices have retreated 26 percent from a record $147.27 a barrel on July 11, they're still up 46 percent over the past year. Producer-price inflation accelerated to 9 percent in July, the highest in at least 18 years.

Inflation in the euro area slowed to 3.8 percent last month from 4 percent in July. The ECB aims to keep the rate below 2 percent. Some labor unions are already pushing through bigger wage increases to compensate workers for the higher cost of living.

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.