Sept. 4 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said the bank remains focused on fighting inflation even after cutting its economic growth forecasts.

``Upside risks to price stability prevail,'' Trichet said at a press conference in Frankfurt today after keeping the benchmark rate at 4.25 percent, a seven-year high. ``We're resolute in our determination to keep inflation expectations in line with price stability.''

The ECB, which raised rates in July, wants to prevent a wage- price spiral as workers demand compensation for higher food and energy costs that pushed inflation to a 16-year high. While the economy is teetering on the brink of a recession, having contracted in the second quarter, ECB council members Axel Weber and Lucas Papademos said last week another rate increase may be necessary if the inflation outlook deteriorates.

Trichet said current interest rates will help to bring inflation back below 2 percent -- the ECB's definition of price stability -- during 2010. While the bank has ``no bias'' on future rates, policy makers ``will do what is necessary to achieve that goal,'' he said.

The euro nevertheless fell a cent to $1.4403 as traders focused on Trichet's comment that Europe's economy is experiencing an ``episode of weak activity'' and growth risks are on the ``downside.'' European government bonds advanced and stocks declined.

Growth Forecasts Cut

The ECB today lowered its 2008 economic growth forecast to 1.4 percent from 1.8 percent and its 2009 prediction to 1.2 percent from 1.5 percent.

``If the economy continues to disappoint in coming quarters, which we think is likely, then the option of lowering rates will become more practicable,'' said Simon Barry, an economist at Ulster Bank Ltd. in Dublin. ``However, for the time being, there is little prospect of a cut.''

While crude oil prices have retreated 26 percent from a record $147.27 a barrel on July 11, they're still up 46 percent over the past year. Inflation in the euro area slowed to 3.8 percent last month from 4 percent in July.

The ECB raised its inflation forecast for this year to 3.5 percent from 3.4 percent and for next to 2.6 percent from 2.4 percent.

`Very Strong Concern'

``There is particularly a very strong concern that the emergence of broad-based second-round effects in price and wage- setting behavior could add significantly to inflationary pressures,'' Trichet said. The ECB is watching wage talks ``with particular attention.''

Some labor unions are already pushing through bigger pay increases to compensate workers for the higher cost of living. Deutsche Lufthansa AG, Europe's second-largest airline, last month agreed to a 5.1 percent raise for some ground staff and cabin crew after a strike forced the cancellation of hundreds of flights.

In Italy, hourly wages rose 4.3 percent in July from a year earlier, the biggest increase in a decade.

IG Metall, Germany's biggest union, starts wage negotiations this month for 3.2 million metal, electronics and car workers. The union has said it will demand a bigger pay increase than the 6.5 percent it asked for last year.

To contact the reporters on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net; Simone Meier in Frankfurt at smeier@bloomberg.net

Last Updated: September 4, 2008 10:49 EDT