Trichet Says ECB `Resolute' in Fighting Inflation

By Gabi Thesing

Sept. 10 (Bloomberg) -- European Central Bank President Jean-Claude Trichet said the euro-region economy is likely to recover from the current slump toward the end of the year and that bringing down inflation remains the bank's primary focus.

``The current episode of weak growth should be followed by a gradual recovery,'' Trichet told lawmakers at the European Parliament in Brussels today. ``The ECB is resolute in its determination to keep medium- to long-term inflation expectations in line with price stability''

Policy makers remain concerned that past oil-price increases will prompt companies to raise prices and workers to demand higher wages to compensate for the increase in the cost of living. The ECB kept interest rates at a seven-year high of 4.25 percent last week. Inflation is running at 3.8 percent, almost twice the bank's limit. At the same time, the economy is struggling to recover from a second-quarter contraction.

Trichet said the 28 percent drop in oil prices from a July 11 record of $147.27 a barrel ``will help strengthen real disposable income.'' A barrel of oil traded around $104 today. That's still 61 percent more expensive than two years ago.

``There is a very strong concern in the Governing Council that higher energy and food prices may lead to the emergence of broad-based second-round effects,'' Trichet said.

Wage Demands

Germany's IG Metall labor union, representing 3.2 million workers, said Sept. 8 it will demand the biggest pay increase in at least 16 years. The union, Germany's biggest, seeks a raise of between 7 percent and 8 percent, according to Chairman Berthold Huber.

The bank raised rates in July after inflation accelerated to 4 percent, the fastest pace in 16 years. Trichet said ``upside risks to price stability over the medium-term have continued to prevail.''

Even though Trichet's comments are almost identical to his introductory statement delivered last week after the bank's rate-setting meeting, ``his slightly more robust delivery gives the impression that he has stepped up his rhetoric,'' said James Nixon, an economist at Societe Generale SA in London.

The ECB raised its inflation projections last week to around 3.5 percent for 2008 and 2.6 percent for 2009. The bank aims to keep inflation just below 2 percent. At the same time, ECB staff lowered the growth forecasts for this year and next to about 1.4 percent and 1.2 percent respectively.

`In a Trough'

The European Commission today also lowered its euro-area growth forecast and raised its prediction for inflation.

The economy shrank 0.2 percent between March and June and the third quarter is ``weak,'' Trichet said. ``We're in a trough,'' he said. After that the governing council expects a ``gradual recovery,'' and ``2010 will be a better year'' than 2009, he said.

For now, ``the current monetary policy stance will contribute to achieving this objective over the medium-term,'' Trichet said, signaling that the bank is in no hurry to change borrowing costs any time soon.

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net.