Trichet Says Inflation Risks May Rise in Medium Term

European Central Bank President Jean-Claude Trichet comments on monetary policy, inflation and growth in the economy of the 17 nations sharing the euro.

He spoke at a press conference in Frankfurt today after the ECB kept its key interest rate at a record low of 1 percent.

On today’s rate decision:

“Based on its regular economic and monetary analyses, the Governing Council confirmed that the current key ECB interest rates are still remain appropriate. It therefore decided to leave them unchanged.

“Taking into account all the new information and analyses which have become available since our meeting of 2 December 2010, we see evidence of short-term upward pressure on overall inflation, mainly owing to energy prices, but this has not so far affected our assessment that price developments will remain in line with price stability over the policy-relevant medium-term horizon. At the same time, very close monitoring is warranted.

“Overall, the current monetary-policy stance remains accommodative. The stance, the provision of liquidity and the allotment modes will be adjusted as appropriate, taking into account the fact that all the non-standard measures taken during the period of acute financial-market tensions are, by construction, temporary in nature. Accordingly, the Governing Council will continue to monitor all developments over the period ahead very closely.

“Risks to this economic outlook are still slightly tilted to the downside.

“A more favorable economic environment should be exploited to make faster progress with fiscal consolidation.

“We are permanently alert. We are never pre-committed not to move interest rates, and our level of interest rates is designed to deliver price stability. As regards monetary policy, it is absolutely crystal clear that we will always do what is necessary and be credible to deliver price stability.

“We are never pre-committed. We proved that in the past by deeds and not words, and by track record and not by theory. We considered all, taken into account our present interest rate appropriate to deliver price stability in the medium term.

“All our non-standard measures are there to help restore a more correct transmission of our monetary-policy stance.”

On whether ECB can raise rates without unwinding non-standard measures:

“They are not correlated. Standard and non-standard measures are disconnected.”

On inflation:

“First on inflation, what we have observed is that it is higher than expected and largely reflects energy prices.

“Inflation rates could temporarily increase further. They’re likely to stay above 2 percent before moderating again toward the end of the year.”

Risks to medium-term inflation “are still broadly balanced, but could move to the upside. We expect inflation over the medium term and long term to continue to be in line with our definition of price stability. We consider our inflation expectation to be firmly anchored.”

Inflation pressures have picked up in the euro region, signaling that debt-stricken nations may face the prospect of interest-rate increases later this year, Trichet said.

“Recent economic data are consistent with a positive underlying momentum of economic activity, while uncertainty remains elevated. Our monetary analysis indicates that inflationary pressures over the medium term should remain contained.”

“We have now 12 years of the euro. The average yearly inflation over 12 years is 1.97 percent. It is in line with our definition of price stability of close to but less than 2 percent. This is remarkable in terms of track record.

“We said and we warn that we see -- taking into account the price of energy -- in the short term we will have CPI over and above 2 percent and peaking up before going down to what is in line with price stability, which is below but close to 2 percent.

“We see, that’s the reason why we didn’t change interest rates today, because we consider they are appropriate, because we consider that we will deliver in the medium term less than 2 but close to 2 percent.”

On the decision on inflation wording:

“The decision we took, we took it unanimously.”

On impact of inflation on economic growth:

“We don’t see any dilemma, we never, never, ever changed our position. We don’t see a dilemma in terms of hampering growth.”

On monetary union:

“This is monetary union. We are responsible for monetary union. The ‘e’ in EMU is economic union. The ‘M’ ‘U’ has delivered exactly what it was called to deliver. I insist on that.”

On Ireland’s stabilization program:

“We consider that it contains the necessary elements to bring about sustainable stabilization of the Irish economy. We encourage Ireland to take any further measures necessary to achieve the objectives of the program.”

On Europe’s responsibility to solve crisis:

“We are asking authorities to be up to their responsibility and this has been our message for months. There is a sense of urgency.”

On stress tests:

“It will be run by the appropriate new authority. We as the ECB have a role to the play and the” European Systemic Risk Board “is also in the picture. But it’s a work in progress and I don’t want to comment on a work in progress.”

On loans to private sector:

“Upward movement in growth of private-sector loans is further confirming that the turning point was reached over the course” of 2010.

On persistent bidders of ECB funds:

“It is an issue we are examining on an ongoing basis. It is a complex issue. There are those institutions in that position. We will continue to do everything to discourage those attitudes, and there are those in the banking sector that have their problems because of the sovereign issue.”

On the European Financial Stability Facility:

“On the EFSF I have already answered: improvement in quantity and quality in terms of intervention of this fund. We are asking governments to improve the EFSF in quantity and quality -- in flexibility in the intervention of the EFSF.”

On the reduction of growth divergencies in the euro region:

“I take the observation of 2009 and 2010, and the projections of 2011 and 2012. We see a progressive reduction of divergences.”

On whether the ECB bought Portuguese bonds yesterday:

“We never comment on what we buy, what we do not buy.”