European Central Bank (ECB) President Jean-Claude Trichet said financial-market tensions are receding and the bank remains committed to fighting inflation.
"Tensions have receded while remaining significant," Trichet said today in a speech at a convention of Germany's Christian Democratic Union party in Wiesbaden, near Frankfurt. "The ECB's Governing Council stands ready to counter upside risks to price stability, in line with its mandate."
The ECB shelved a planned rate increase in September to assess the economic impact of the US housing slump, which made banks reluctant to lend and pushed up credit costs. Since then, euro-region inflation has accelerated to the fastest pace in more than six years, prompting some ECB council members to call for a rate increase.
Inflation, which the ECB aims to keep just below 2 percent, held at 3.1 percent last month, the EU's statistics office in Luxembourg said yesterday.
ECB policymakers will convene in Frankfurt on Thursday to decide again on interest rates. All 43 economists in a Bloomberg News survey expect the bank to keep its benchmark rate at 4 percent. Trichet said that his comments yesterday should not be "interpreted in terms of our future decision [this] Thursday."
Policymakers have to consider whether faster inflation, spurred by oil prices about US$100 a barrel, or slowing economic growth pose the greater risk.
The US Federal Reserve has lowered its benchmark rate three times to 4.25 percent since September to shore up the world's largest economy. Traders increased bets this past week that the Fed will cut its key rate by another half-point this month after industry surveys showed manufacturing slumped to the lowest level in almost five years last month and unemployment jumped to a two-year high.
Trichet said risks to the outlook for economic growth in Europe "lie on the downside," with financial-market volatility causing a "high level of uncertainty."
Borrowing costs jumped in August as banks began to reveal losses on securities linked to US mortgages aimed at people with poor credit histories, causing lenders to hoard cash. Losses from US subprime mortgage foreclosures will probably reach US$300 billion, the Organization for Economic Cooperation and Development said on Nov. 22.
When the credit squeeze continued into last month, the Fed, the ECB and three other central banks acted in concert. The Fed held special auctions to increase cash in US money markets, and made up to US$24 billion available to the ECB and Swiss National Bank to increase the supply of dollars in Europe. The ECB added an unprecedented 349 billion euros (US$515 billion) in two-week money.
Money-market rates have dropped since then. The cost of borrowing euros for three months fell to 4.63 percent yesterday from a seven-year high of 4.95 percent on Dec. 17, the day before the ECB added the funds. The equivalent dollar and pound rates have also tumbled since the middle of last month.
The three-month euro rate is still 63 basis points above the ECB's benchmark interest rate of 4 percent, up from an average of 25 basis points in the first half of last year.
ECB Vice-President Lucas Papademos said in a speech in New Orleans yesterday that the bank's provision of additional liquidity to reduce market volatility did "not undermine the price stability objective."