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ECB warns of spiralling food costs
European Central Bank (ECB) policymakers warned about the danger that higher food and energy prices posed to inflation and said they were also keeping a close eye on turbulent financial markets.
- Reuters
- Published: 01:09 March 8, 2008
Paris/Oslo: European Central Bank (ECB) policymakers warned about the danger that higher food and energy prices posed to inflation and said they were also keeping a close eye on turbulent fin-ancial markets.
ECB President Jean-Claude Trichet, speaking the day after the bank held rates steady at 4 per cent, said unmet demand from emerging markets was to blame for rising food prices in Europe, which have pushed inflation to a record 3.2 per cent high.
"The current surge in commodity prices, including food more recently ... reminds us that globalisation can also lead to upside risks in world inflation," he said at a Bank of France conference in Paris.
Bank of France Governor Christian Noyer said higher commodity prices were a long-term trend.
"The growth of emerging market economies ... are leading to a surge in the demand for natural resources, food, and energy, which logically has a strong and permanent impact on inflation."
The ECB is currently caught in a policymaking dilemma, as high inflation gives it little scope to cut rates in response to increasing signs of a spillover from the housing-led slowdown in the United States.
German Bundesbank President Axel Weber said that even with the falls in food prices assumed in Thursday's new ECB staff forecasts - which the bank's rate-setting Governing Council does not formally endorse - inflation looked set to be above target into next year.
"The current inflationary outlook and the medium-term upside risks are our major concern," he told a Norwegian central bank conference. "Weaker growth prospects do not pose sufficient reason to expect a dampening of inflationary pressures in the foreseeable future," he said, adding that bond markets showed investors' long-term inflation expectations were rising.
The euro-zone growth slowdown that started in the last three months of 2007 seemed to be continuing but economic activity should start to return to its long-term trend in the second half of this year, Weber said.
Financial market turmoil was making reading the economy harder, Noyer and his Dutch counterpart Nout Wellink said.
"We must remain exceptionally alert and flexible to encounter adverse dynamics that may threaten financial or economic stability," Wellink said at the Bank of France event.
Trichet agreed. "We are very closely monitoring the ongoing significant market correction we have experienced since the middle of last year, taking into account all their possible consequences, including on inflation."
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