Trichet says market correction ‘ongoing’

Trichet says market correction ‘ongoing’

By Ralph Atkins and Richard Milne in Frankfurt and Chris Giles in London

Published: May 19 2008 11:11 | Last updated: May 19 2008 19:08

Europe’s top banker on Monday sought to stiffen the resolve of policymakers in the fight against inflation in order to avoid the mass unemployment seen in the 1970s.

The warning from Jean-Claude Trichet, European Central Bank president, came even as he acknowledged that financial markets were still witnessing “an ongoing, very significant market correction”. This suggests he strongly believes central banks should resist pressure to cut interest rates even if financial market tensions continue easing and economic growth slows.

Soaring oil and food prices had created “demanding times, challenging times”, Mr Trichet said. The challenge was to prevent such inflationary pressures creating lasting “second-round effects” by feeding through into wage deals. Mistakes made at the time of the first “oil shock” in the 1970s had “enshrined the high level of inflation for a long period of time” and led to mass unemployment in Europe, he said.

Eurozone inflation, at 3.3 per cent in April, remains above the ECB’s target of an annual rate “below but close” to 2 per cent and eurozone interest rates have remained unchanged at 4 per cent for almost a year.

In the UK, interest rates have been cut three times since last summer, but investors no longer expect any more cuts as the inflation outlook has darkened on bad figures last week.

Mr Trichet’s comments, made in a BBC interview, come as long-term market expectations of UK inflation rise to their highest level in more than a decade, wiping out the gains made since the Bank of England was given the ability to set interest rates independently in 1997, and casting doubt on the credibility of UK monetary policy.

Mr Trichet’s cautious outlook on the financial market turmoil was echoed by Warren Buffett, the billionaire US investor, who said he believed the effects of the financial crisis were “far from over”.

“I think the Wall Street crisis is mostly over although I don’t know,” Mr Buffett said in Frankfurt during a four-country tour of Europe. “But I don’t think we are half way or even a quarter of the way through the impact in the general economy.”

The crisis was beginning to be felt not just by those who had been “silliest” but also now by people ”who did sound things”.