2ND UPDATE:Trichet: Rate Hike To Prevent 2nd-Round Effects

(Updates with more information from Trichet press conference and reaction.)

 
   By Christopher Emsden 
   Of DOW JONES NEWSWIRES 
 

FRANKFURT -(Dow Jones)- European Central Bank President Jean-Claude Trichet said that Thursday's decision to raise interest rates by 25 basis points was to reduce inflation expectations, but he gave no indication of future moves.

Speaking at a news conference after the decision, Trichet cited upside risks to price stability over the medium term and stressed that the ECB had "strong determination" to anchor inflation expectations.

The ECB raised its main policy interest rate to 4.25% from 4.0% on Thursday, a move it had previously signaled amid signs that euro-zone inflation was gathering steam as soaring fuel and food prices fed into the broader economy.

Trichet in particular warned producers of goods and services against passing more price increases along to consumers. Wage negotiators also were cautioned to maintain moderation to contain "second-round" price pressures.

"The (ECB) Governing Council is monitoring price-setting behavior and wage negotiations in the euro area with particular attention," he said.

As for the sharp jump in oil and food prices over the past year, Trichet said they "have to be accepted" and stressed that they would require "changes in behavior by companies and households."

Euro-zone inflation ran at a 4.0% annual rate in June, the fastest in 16 years and twice the rate targeted by the ECB. Recent oil price moves make it likely that inflation could accelerate further in the coming months.

"Risks to price stability at the policy-relevant medium term remain on the upside, and have risen further from a few months ago," Trichet said. The ECB will "monitor very closely" all developments in price trends, he added.

Trichet adopted another adopted a balanced view. "Starting from here, I have no bias," he said when asked if the ECB thinks it monetary policy will need to be tightened further in coming months.

He also said that Thursday's rate hike "will contribute to achieving price stability" in the medium term.

That language effectively "leaves the rate outlook wide open," said Bank of America economist Holger Schmieding.

Trichet acknowledged the weakening growth trend in European economies, noting that the ECB does not expect employment trends to boost household purchasing power.

"While the latest data confirm the expected weakening of real GDP growth in mid-2008 after exceptionally strong growth in the first quarter, the economic fundamentals of the euro area are sound," Trichet said. Investors broadly interpreted Trichet's message as a dovish one.

The possibility of more rate hikes are "quite unlikely, at least in the short run," said Aurelio Maccario chief euro-zone economist for Unicredit.

The yield curve on European government bonds steepened, indicating that markets do not expect the ECB to push short-term interest rates up aggressively.

The euro also fell nearly 1% against the U.S. dollar, taking the Euro down to $1.5740 from about 1.5900 before Trichet began speaking.

-By Christopher Emsden, Dow Jones Newswires; +39-02-58-21-99-05; chris.emsden@dowjones.com

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(END) Dow Jones Newswires

July 03, 2008 09:58 ET (13:58 GMT)


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