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Despite market turmoil, ECB keeps eye on inflation

Despite market turmoil, ECB keeps eye on inflation

The European Central Bank has made it clear it is keeping its focus on inflation, indicating an interest rate increase can still be expected as early as next month despite the market turmoil triggered by Japan's disasters and the Libyan conflict.
Some analysts had thought the bank might back off the rate hike _ clearly telegraphed at its March 3 meeting _ because of the unsettling impact on financial markets from the earthquake, tsunami and nuclear disaster in Japan as well as military strikes in Libya.
But ECB chief Jean-Claude Trichet repeated his tough talk Monday, telling European parliamentary deputies that "inflation in the euro area is on the rise" and "the risks to prices are on the upside."
Other members of the bank's rate-setting governing council, Yves Mersch and Gertrude Tumpell-Gugerell, made similar statements that stressed the ECB had not changed its stance because of the greater uncertainty in world markets.
Deputies' questions gave Trichet several opportunities to modify his statements from the March meeting. He responded by doubling down with his anti-inflation message.
"What we have to do is deliver price stability for the euro area as a whole," he said. "It is extremely important that we deliver because it is what our fellow citizens are asking from us."
Higher rates are central banks' chief weapon against inflation, but can weaken growth and confidence on stock markets if done at the wrong time. The bank has left its benchmark interest rate at 1 percent since May 2009, even as inflation in the countries using the euro has risen to an annual 2.4 percent in February _ above the bank's goal of just under 2 percent.
By treaty, the European Central Bank's mandate is focussed solely on fighting inflation, unlike the U.S. Federal Reserve, which has a broader mandate to control inflation and also boost employment _ and shows no signs of raising rates.
"ECB policymakers have been out in force on Monday, indicating that the ECB is still minded to raise interest rates at its 7 April meeting despite events in Japan and Libya," said analyst Howard Archer at IHS Global Insight. "While there is still nearly two weeks to go to the April 7 policy meeting and it is possible that events in both Japan and Libya could yet lead to a change of plans, the ECB currently seems to be of the view that the economic effects on the eurozone will be limited."
The comments helped the euro, pushing it up to $1.4213 _ the first time it has ventured past the $1.42 mark since November _ from $1.4150 earlier in the day. The expectation of higher interest rates often supports a currency by increasing its attractiveness to investors.
Trichet said little directly about Japan, but indicated that he felt the Group of Seven industrial countries had done the right thing by intervening in currency markets to keep the Japanese currency from rising too quickly and undermining Japan's export-oriented economy.
He seemed to indicate that the current disaster was worse than the 1995 Kobe earthquake _ which killed thousands but ultimately had little lasting impact on the world economy _ but alluded to what many other economists are saying, that the reconstruction effort will provide a boost to growth.
"It's clear the human drama is terrible... The usual profile is that you have first a big diminution of activity directly linked" to the disaster, he said, "and then after a certain period of time... you have the reconstruction."
Trichet hammered at his earlier warning that, with oil and food prices rising, the central bank must avoid expectations of higher prices from being built into wage and price agreements and resulting in a vicious inflationary spiral _ so-called second-round effects.
In a situation with price rises "of a fairly significant nature, the main problem for central banks is avoiding second-round effects," he said.