President Europese Centrale Bank Trichet over de hoogte van de rente, inflatie en financiële onrust (en)

Jean-Claude Trichet i told the Economics Committee on Wednesday that the "hump" in inflation would be longer than previously projected and risks were on the upside. Growth for the eurozone should be at around potential in the year ahead, but risks to that projection were on the downside. The continuing turbulence in financial markets also featured strongly in the final "monetary dialogue" with the European Central Bank i President of 2007.

Alexander Radwan (EPP-ED, DE) was among those asking what lessons could be drawn from the turbulence on the financial markets. Mr Trichet said previous "under-pricing of risk in general" had not been sustainable, so some re-appreciation of risk had been inevitable. It was, he said still too early to draw final conclusions, but among the lessons was a need for close links between central banks and banking supervisors. "Much improvement is needed by commercial banks and institutions; they have the first responsibility in a market economy. They should not rely blindly on ratings agencies and will need to reflect on certain business models: originate and distribute has clear drawbacks." Conflicts of interest affecting ratings agencies also needed attention, he said. 

"We are not pouring in liquidity"

John Purvis (EPP-ED, UK) asked whether the ECB's own balance sheet would be affected by its loans to banks to help increase liquidity. No, said Mr Trichet: "We are lending on a short term basis on the same collateral as we have always required, that has not loosened at all. We are not pouring in liquidity, as the loans are paid back too. We have displaced liquidity in time rather than adding to it." Central banks' money market activity would not solve the problems alone, he said, but he was hopeful that the publication of full-year audited accounts for the financial sector would provide a necessary dose of increased transparency.

Avoiding second round price and wage rises

Mr Trichet repeatedly stressed, in answer to Elisa Ferreira (PES, PT), the importance of avoiding second round inflationary effects from the current rise in oil, commodity and food prices. Responding to Dariusz Rosati (PES, PL), he warned: "What we say is we will not tolerate second round effects (...) Our last decision on interest rates was to remain alert. The level of interest rates is in line, with permanent alertness, with our goal of price stability in the medium term. We will do whatever is necessary." He called on all those involved in setting salaries and prices to act with moderation.

Rate setting and money market operations not mixed

In answering questions from José Manuel Garcia Margallo (EPP-ED, ES) and Wolf Klinz (ALDE, DE) on the relationship between interest rate setting and operations to ensure liquidity in the money markets, Mr Trichet was clear: "We do not mix our two responsibilities. Interest rates depend on the level needed to deliver price stability. This has nothing to do with what might be necessary to care for the proper functioning of the money market."

Indexation and indirect taxes

Astrid Lulling (EPP-ED, LU) and Mia De Wits (PES, BE) both asked about indexation systems, which some countries use to increase salaries automatically in line with inflation. "Indexation of prices and salaries is a very bad thing," said Mr Trichet. "It guarantees second round effects, precisely what we want to avoid," he added saying indexation was an enormous risk for growth and job creation. He also agreed with Mrs Lulling that Member States should avoid increasing inflation by raising further administered prices and indirect taxes.

18/12/2007

Committee on Economic and Monetary Affairs

In the chair : Pervenche Berès (PES, FR)