Trichet Says ECB to Do All That Is Needed on Prices

[HenryTo]

Trichet may well raise rates to 3.25% by the end of this year but just like Japan, the European Central Bank will most likely keep rates relatively low (below 4%, and for Japan, probably 2% or below) for the rest of this decade.
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Trichet Says ECB to Do All That Is Needed on Prices (Update2)
June 21 (Bloomberg) -- European Central Bank President Jean-Claude Trichet promised to do ``all that is necessary'' to contain inflation as economic growth and price pressures remain robust, indicating he will seek to raise interest rates in coming months.

``We'll continue to do all that's necessary to counter inflationary risks and anchor inflationary expectations,'' Trichet told the European Parliament's economic and monetary committee in Brussels today. ``And it seems to be that it's very well understood by observers.''

The ECB raised its benchmark rate for the third time in six months on June 8, by a quarter point to 2.75 percent, and signaled further increases may be needed amid near-record oil prices and faster growth. Futures trading shows investors expect the ECB to lift the rate by at least 25 basis points per quarter, taking it to 3.25 percent by the end of the year.

``Economic growth is broadening and gradually becoming more sustained,'' Trichet said. ``In the remainder of 2006 and in 2007, inflation rates are likely to remain elevated.''

``Monetary policy in the euro area remains accommodative,'' he added.

Bonds Fall

Concern about higher growth and inflation propelled the yield on German two-year bond to its highest since August 2002. The yield on the benchmark German two-year note, among the securities most sensitive to changes in rate expectations, rose 2 basis points to 3.47 percent by 8:52 a.m. in London, after earlier rising to 3.48 percent, its highest since Aug. 30, 2002.

``The ECB is still very much in a tightening mode,'' said Lena Komileva, an economist at Tullett Prebon in London. ``Trichet is reinforcing the view that the ECB will do all it can to protect its inflation-fighting credibility.''

Trichet told lawmakers that ``very strong'' credit growth, expanding money supply, high fuel prices and rising wages represent price pressures. Business and consumer spending are expected to pick up and exports remain strong, he said.

The bank this month held its growth forecast for this year at about 2.1 percent, which would match the fastest pace since 2000, and increased its inflation forecast to about 2.3 percent from 2.2 percent. The bank aims to keep inflation just below 2 percent.

``We will be faithful to our mandate of which the primary goal is price stability,'' he said.

The $10 trillion economy grew 0.6 percent in the first quarter from the previous three months and confidence among executives and households in May reached its highest in five years.

Trichet identified oil prices, the growth of hedge funds and the housing market as requiring monitoring. He declined to comment on the euro's gain against the dollar and called on other central bankers and politicians to do the ``homework'' necessary to narrow global economic imbalances such as the U.S. trade gap.

The ECB's governing council next meets to set interest rates on July 6.