Trichet Signals ECB May Look Through Temporary Inflation Jump

Bloomberg (Jan 24)--European Central Bank President Jean-Claude Trichet signaled the bank won’t react to a temporary jump in inflation caused by higher commodity prices as long as it doesn’t fuel wage increases, or so-called “second-round effects.”

“All central banks, in periods like this where you have inflation threats that are coming from commodities, have to go through the hump and be very careful that there are no second- round effects,” Trichet said in an interview with the Wall Street Journal, according to a text published by the Frankfurt- based ECB late yesterday. “This is what we are doing,” he said, adding the ECB doesn’t see any second-round effects “at this stage.”

Trichet earlier this month toughened his rhetoric on inflation after it accelerated to 2.2 percent in December, breaching the ECB’s 2 percent limit for the first time in more than two years. The change in tone prompted some economists to bring forward forecasts for ECB rate increases and helped drive the euro more than five cents higher against the dollar. Since then, ECB policy makers have indicated markets may have over- interpreted the central bank’s message.

Trichet said the ECB’s benchmark interest rate remains “appropriate” at a record low of 1 percent, suggesting he sees no need to raise it soon. At the same time, “on the side of energy and commodity prices we have a number of developments that we will continue to monitor closely,” he said. “Everybody knows we would not let second-round effects materialize.”

The price of crude oil has more than doubled in the past two years, driving up energy costs. Chemical workers in Germany, Europe’s largest economy, on Dec. 7 demanded up to 7 percent more pay, and the country’s IG Metall union has asked for a 6 percent increase for workers at companies including Volkswagen AG.

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net