Despite the recent sharp cuts in US interest rates, the European Central Bank will remain focused on fighting inflation without modifying current rates, said ECB President Jean-Claude Trichet yesterday.
In a speech in the European Parliament, Trichet argued that “in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility in already highly volatile markets”.
The president of the ECB did not comment on the 0.75% cut announced on Tuesday by Ben Bernanke, chairman of the US Federal Reserve. The cut was the most substantial for 23 years and highlighted the US central bank’s concern about recession risks in the US economy.
Trichet’s speech was among the factors behind the drop in European stock markets recorded on Wednesday. London FTSE 100 dropped 2.3% and Germany’s Xetra Dax index fell 4.88%. However, the dollar held strong against the euro.
Trichet repeated that his focus will remain on the real economy to prevent risks of price increases, and turbulences such as those provoked by the sub-prime mortgage crisis that has hit US since this summer. “We will see how the real economy develops in the future because it can have an effect on inflation”, he commented.
In face of the present market correction, considered as “particularly complex, multidimensional, and ongoing,” Trichet recalled that the EU financial institutions have the role of safeguarding “financial stability effectively,” while contributing to “removing the remaining obstacles to financial integration”.
“This mainly requires identifying and reducing to a minimum the existing divergences in national laws and also in supervisory requirements and practices, which still hinder the effective functioning of the single financial market,” he added.
Maintaining his focus on the real economy, Trichet recalled that to “ensure effective crisis management and resolution at the EU level, it is crucial that all responsible authorities maintain a high degree of preparedness to handle the complexity of a cross-border crisis situation, while preserving the necessary flexibility of action”.