Trichet Says Central Banks See Economic Recovery After Slowdown

By Simone Meier

Sept. 8 (Bloomberg) -- European Central Bank President Jean-Claude Trichet said global central banks expect the world economy to re-gather strength after a slowdown.

``We see at the level of the global economy that growth remains positive and significant,'' Trichet said at a briefing after chairing a meeting of central bankers from around the world in Basel, Switzerland. There will be a ``slowing down'' of growth followed by ``some picking up,'' he said.

Economic growth in emerging markets such as China, India and Russia has bolstered global expansion even after a housing slump pushed the U.S. economy close to a recession. Trichet said global central banks remain committed to fighting inflation.

``We see inflation very high at a global level,'' he said. ``We all agree that at the level of the central bank constituency, a solid anchoring in inflation expectations is of the essence for all of us in the present global environment.''

In the U.S., the Federal Reserve has kept its key rate on hold for the past five months, while the ECB in July raised borrowing costs to a seven-year high to fight inflation.

The Organization for Economic Cooperation and Development said on Sept. 2 that the world's leading central banks should keep borrowing costs at their current levels to balance strong inflation with reduced expansion. The Paris-based group forecast ``weak activity through the end of the year.''

Headline Inflation

With the global economy losing strength, it has become more difficult for central banks to raise interest rates to fight inflation. Crude oil prices have surged 39 percent in the past year, reaching a record $147.27 a barrel on July 11.

``After the shocks, headline inflation will have to go back to the definition of price stability'' in each nation, Trichet said. ``We all consider that we have an abnormal level of'' headline inflation because of ``commodity prices, food prices. We have to avoid second-round effects.''

Global inflation is already eroding the spending power of companies and consumers. In Japan and the 15-nation euro region, gross domestic product fell in the second quarter.

The International Monetary Fund said on July 17 that rising global inflation threats are constraining the ``policy response to slower growth.'' Among industrial economies, the case for rate increases ``is stronger than before the recent oil-price increase,'' the Washington-based fund said.

`Scope for Optimism'

``There might be some scope for optimism with respect to commodity prices,'' said Steven Barrow, head of G-10 research at Standard Bank in London. The retreat in oil prices ``could open up a little bit of a window for some central banks to talk in more dovish terms.''

The ECB on Sept. 4 kept its key rate at a seven-year high of 4.25 percent to keep faster inflation from fueling wages. By comparison, the Fed earlier this year ended a series of cuts that had slashed borrowing costs by 3.25 percentage points to 2 percent since September. That's still above the Bank of Japan's 0.5 percent main lending rate.

Central banks ``are waiting for inflation pressures to ease on weaker growth,'' said Janwillem Acket, chief economist at Julius Baer Holding AG in Zurich. ``The second half will be even weaker than the first six months.''

Trichet, 65, met with his counterparts from the world's largest central banks. The G-10 meeting is held every two months under the auspices of the Bank for International Settlements, the central bank of the world's central banks.

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