May 6 (Bloomberg) -- European Central Bank President Jean-Claude Trichet said policy makers remain “extremely alert” on inflation, and indicated they may make further decisions on the pace of monetary tightening with new forecasts in June.
The ECB is “monitoring very closely all that will happen” after keeping its benchmark interest rate at 1.25 percent yesterday, Trichet told Bloomberg Television in an interview in Helsinki today. “We will of course have a new rendezvous with our new projections next month.”
ECB council members including Italy’s Mario Draghi, seen as the frontrunner to replace Trichet from November, have signaled concern that rising oil prices will feed into wage demands and spark more persistent inflation. Trichet yesterday refrained from using the phrase “strong vigilance” that would have paved the way for a June rate increase, suggesting policy makers are waiting for the latest economic projections.
“Extremely alert is quite hawkish and the reference to the projections is a very important one as well,” said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc in London. “The question is whether they’re keeping the door open to a rate hike as early as June.”
The euro rose a quarter of a cent after Trichet’s comments were published before easing to $1.4527 at 12:35 p.m. in Frankfurt.
The ECB raised its key rate from a record low of 1 percent in April, the first increase in almost three years.
“We increased rates last month and this month we maintained rates at the present level, remaining extremely alert,” Trichet said. “We have of course a primary goal, which is to deliver price stability in the medium run and be credible in this delivery of price stability. We will continue to do that.”
Euro-region inflation accelerated to 2.8 percent last month, the fastest in 2 1/2 years. The ECB aims to keep the rate just below 2 percent.
Trichet welcomed the recent drop in crude oil prices to below $100 a barrel, saying it’s “good from the inflation standpoint.” Lower oil prices are also “better for the consolidation of the recovery, in particular in the advanced economies,” he said.
Policy makers are facing the dilemma of surging commodity costs fueling price pressures while governments from Ireland to Spain are struggling to lower their budget deficits and revive economic growth.
In its last projections published in March, the ECB forecast the euro-area economy will grow 1.7 percent this year and 1.8 percent in 2012. Inflation will average 2.3 percent this year and 1.7 percent next year, the bank predicted.
The 17-member euro region is showing an “ongoing recovery,” which is “positive in the present circumstances,” Trichet said.
Societe Generale SA economist James Nixon said in an e-mailed note after yesterday’s rate decision that he expects the ECB to resume raising borrowing costs in July, a month later than previously projected. The central bank may also increase rates in October and January, he said.
Trichet will retire on Oct. 31 after serving an eight-year term at the central bank.
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