The eurozone faces short-term price pressures which could linger, the European Central Bank said on Thursday, showing it could raise interest rates to contain inflation even while the bloc is gripped by a debt crisis. ECB President Jean-Claude Trichet said prices needed to be monitored very closely after eurozone inflation jumped last month to 2.2 percent, the first time in two years it has risen above the central bank''s target of just below 2 percent.
-- Trichet sees short-term inflation pressures
-- Rates on hold, as they have been since May 2009
The ECB left rates on hold at a record low of 1 percent - a level Trichet said was "still appropriate". Risks to the medium-term outlook for price developments were still broadly balanced, "but could move to the upside", he added. "We see evidence of short-term upward pressure on overall inflation, mainly owing to energy prices, which has not so far affected our assessment that price developments will remain in line with price stability over the policy-relevant horizon," Trichet told a news conference.
"We are permanently alert. We are never pre-committed not to move interest rates and our level of interest rates is designed to permit to deliver price stability." The euro extended its gains versus the dollar in response to his remarks and short-dated bond yields rose.
"He sent a mild warning to markets that the ECB''s assessment on interest rates could change," said Commerzbank economist Michael Schubert. In 2008, the ECB hiked rates due to oil price-fuelled inflation just ahead of the Lehman bankruptcy that tipped the global financial system into full-blown crisis. Trichet made a point of reminding reporters of that but said that while inflation could remain above target for a while, it was likely to subside towards the end of the year.
With inflation taking off, most notably in fast-growing emerging economies, several countries are already raising rates. South Korea and Thailand were the latest Asian economies this week to tighten as policymakers battle the impact of surging prices of food and other commodities. Trichet put the onus firmly on euro zone governments to put their own houses in order to draw a line under the euro zone debt crisis which has forced Greece and Ireland to seek bailouts.
Successful bond auctions by Spain and Portugal this week eased some of the fears they may be next to seek outside aid. "In view of the ongoing vulnerability to adverse market reactions, countries need to do their utmost to meet their deficit targets and put government debt and GDP ratios firmly on a downward trajectory," Trichet said.