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Wednesday, June 25, 2008

Trichet: ECB Considers "Small" Rate Hike July 3

BRUSSELS (Dow Jones)--European Central Bank President Jean-Claude Trichet repeated Wednesday that the rate-setting ECB governing council could raise the key interest rate July 3, but refused to comment on policy action further down the road to combat runaway inflation.

Trichet told the European Parliament Committee on Economic and Monetary Affairs in Brussels that the governing council may raise the ECB's main refinancing interest rate "by a small amount" to 4.25% from 4% currently, to anchor inflation expectations.

"I said it's possible," Trichet said, adding that markets participants had given this message the necessary attention.

2008.06.25 12:25:14
The ECB is widely expected to hike its key interest rate at the governing council's July 3 meeting.

When asked which trajectory the ECB would likely envisage for its monetary policy after the next meeting, Trichet refused to make any specific comments.

"I didn't say, we would envisage a series of increases. I didn't say that!" Trichet said. "We never precommit."

Trichet said the no-precommitment policy is lending credibility to the ECB, which was crucial for the conduct of monetary policy and its fight against inflation.

Trichet described himself as they only messenger conveying the governing council's mutual view.

He said the governing council is in a state of "heightened alertness," against a backdrop of significant upside risks to price stability.

The risks of triggering a wage-price inflation spiral currently "is particularly acute," he said.

Recent spikes in the euro zone's consumer price index may mislead people into believing that high inflation is here to stay, Trichet said, adding that it's imperative to keep private inflation expectations at levels consistent with price stability.

The ECB defines price stability as an inflation rate of just below 2% over the medium term.

However, the CPI averaged 3.7% in the 15 countries that share the euro and is expected to stay above 3.0% for the remainder of the year, mainly driven by rampaging oil and energy prices.

It's absolutely essential that the world's oil producers recently pledged to do "what they can to augment" upstream production, .

Trichet said he's not so sure that "that speculation is the major culprit" to blame for surging oil prices, but he rather thinks the oil price is mainly a function of "very, very active demand" and rather steady supply.

He added that financial markets likely underestimated the global demand for raw materials and oil, in particular in the past.

He said current price movements were a result of reallocation in portfolios.

ECB Web site: www.ecb.int

-By Roman Kessler, Nina Koeppen and Adam Cohen, Dow Jones Newswires; +4969 2972 5514, roman.kessler@dowjones.com

(END) Dow Jones Newswires

June 25, 2008 06:25 ET (10:25 GMT)

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