Trichet says ECB must exercise 'strong vigilance' on inflation risks UPDATE

Trichet says ECB must exercise 'strong vigilance' on inflation risks UPDATE

	Published : Thu, 08 Feb 2007 15:51 By : Agencies Print this Story

(Updates with additional comments from Trichet's introductory statement)

FRANKFURT (AFX) - European Central Bank president Jean-Claude Trichet said the ECB must exercise strong vigilance on inflation risks in the euro zone.

Trichet said in his introductory statement to the ECB's monthly news conference, '...strong vigilance remains of the essence so as to ensure that risks to price stability over the medium term do not materialise'.

Trichet's reintroduction of the term 'strong vigilance' into his introductory statement will be seen as confirmation that the ECB is preparing to raise rates again at its next monetary policy meeting on March 8.

Trichet indicated last month that he was comfortable with market expectations for a March rate hike.

The ECB left rates unchanged at today's council meeting, keeping its main refinancing rate at 3.50 pct.

In his statement, Trichet also said that 'acting in a firm and timely manner to ensure price stability in the medium term remains warranted'.

He said ECB monetary policy continues to be accommodative and that interest rates are still at 'low levels'.

Trichet said the latest indicators and survey data suggest that the economic expansion in the euro zone has continued into 2007 and are mains solid and broad-based'.

'Conditions remain in place for the euro area economy to continue to expand at rates around potential,' he said.

Risks to this 'favourable' growth outlook relate to fears of a rise in protectionist pressures, the possibility of renewed oil price rises and concerns about possible disorderly developments as a result of global imbalances, Trichet said.

He said last month's 3 percentage-point increase in Germany's value-added tax (VAT) was apparently not fully reflected in consumer prices in January.

Trichet said on the basis of current prices for oil and oil futures and previous oil price developments, significant favourable base effects may progressively lead to lower inflation rates in the spring and summer.

'However, these effects will be temporary. Later in 2007 inflation rates are expected to rise again as a result of unfavourable base effects,' he said.

Trichet said the medium to longer-term outlook for price stability in the euro zone are mains subject to upside risks'.

These risks include a stronger-than-expected pass-through of past oil price rises into consumer prices, additional increases in administered prices and indirect taxes beyond those announced so far and, in particular, stronger-than-expected wage developments, Trichet said.

'The governing council will monitor the upcoming wage negotiations in the euro area countries very carefully,' he said.

Trichet said persistent strong monetary and credit growth in an environment of ample liquidity point to upside risks to price stability over the medium-to-longer-term.

'Monetary developments therefore continue to require very careful monitoring, particularly against the background of a solid expansion in economic activity and continued strong property market developments in many parts of the euro area,' he added.

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