Trichet: Must Mull Oil Price Effect On Deflation, Expansion

Trichet: Must Mull Oil Price Effect On Deflation, Expansion

PARIS -(Dow Jones)- The retreat in energy prices is a step in the right direction for the global economy, but the drop has ramifications that should be carefully considered, the head of the European Central Bank said Tuesday.

"A lower oil price has deflationary and expansionist effects; these are important elements to take into consideration," ECB President Jean-Claude Trichet said.

The official said he had nothing to add about the ECB's interest-rate policy and reiterated that the euro-zone central bank's price stability-oriented policy still calls for inflation to be held below, though close to, 2%.

The ECB has cut rates aggressively recently to help foster economic growth at a time of plunging energy prices. But its cuts have not run as deeply as other central banks, such as the U.S. Federal Reserve.

Financial markets have been watching to see if the spreading economic recession in Europe will force the ECB's hand in reducing rates further.

In the meantime, Trichet said confidence is returning to financial markets and that 2009 could be a better year if confidence is restored.

But the entire financial system still needs to be improved to achieve more transparency of financial markets, instruments and institutions, Trichet added.

He also said the U.K., which remains outside the euro zone, would be welcomed into the 15-member single-currency zone if it wished to join. He added that he has nothing negative to say about sterling.

In the past two months, the pound has plunged against the euro, nearing an unprecedented one-for-one parity. On Tuesday, the pound was steady at EUR1.05. Back in January, the U.K. currency was fetching around EUR1.35.

Trichet said the big credit default swaps market still lacks transparency and there's a need to find a defense against future liquidity crises.

The international economy can't be stable without proper regulation, supervision of cross-border institutions is important, Trichet noted.

The ECB president also called for risk management at major companies to be revised.

-By Nico Parasie and Ruth Bender, Dow Jones Newswires; +33 1 4017 1740; [email protected] and [email protected]

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(END) Dow Jones Newswires

December 23, 2008 15:26 ET (20:26 GMT)

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