Trichet: ECB determined to combat inflation
Calls risk of euro-zone inflationary wage-price spiral 'particularly acute'
LONDON (MarketWatch) -- The European Central Bank could boost its key interest rate by a quarter of a percentage point next week in an effort to arrest growing inflation pressures, ECB President Jean-Claude Trichet said Wednesday.
"I said it's possible," Trichet said, echoing his previous warning, in testimony before a European Parliament committee in Brussels. Markets widely expect the ECB to hike its main lending rate to 4.25%, up from 4% currently.
Trichet also appeared to downplay the threat of further rate hikes, telling the committee he never said that he envisaged "a series of increases."
But the central bank chief also refused to rule out further moves, saying the ECB's governing council never "precommits" when it comes to decisions on monetary policy.
"Overall, today's comments seem if anything to suggest to us a slightly higher risk that the ECB might raise rates more than once, and certainly is likely to continue to sound 'hawkish' at the forthcoming July 3 policy meeting," wrote Julian Callow, economist at Barclays Capital. A quarter-point rate hike is virtually assured, he said.
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Consumer inflation in the euro-zone nations rose at an annual rate of 3.7% in May, well above the ECB's target of just below 2%.
The ECB fears inflation could become more entrenched as businesses and workers seek higher prices and wage settlements.
"In particular, wage growth may be stronger than anticipated, given high rates of capacity utilization and a tight labor market," Trichet said. "In this context, the risk of triggering an inflationary wage-price spiral is particularly acute" -- especially, he said, in cases where wages are indexed to inflation.
"Moreover, price increases in particular in parts of the services sector that lack competition may be higher than currently expected," Trichet said.
Mixed signals
A closely watched purchasing-managers index for the euro zone released earlier this week pointed to a contraction in manufacturing and services activity across the 15-nation region in June.
Also, the Munich-based Ifo Institute's monthly business-climate index fell more sharply than expected as German companies grew increasingly worried about the impact of surging energy prices and the potential for a strong euro to weigh on exports. Germany ranks as the largest European economy. See full story.
The figures had led some economists to question whether the ECB would be as likely to follow through on hints of a rate increase next month.
Trichet, in his testimony, repeated that the economy is expected to hit a trough in mid-2008 before gradually recovering.
"Looking forward, domestic and foreign demand are expected to support ongoing economic expansion, albeit to a lesser extent than during 2007," Trichet said. "The euro-area economy has sound fundamentals and does not suffer from major imbalances."
At the same time, uncertainty about growth prospects remains high, he said, with downside risks tied to the potential for more bad news from global financial markets and the possibility of further, unanticipated increases in food and energy prices. 
William L. Watts is a reporter for MarketWatch in London.
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