Agoracom

Very very interesting. Reason for Gold strength today

May 8 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said inflation will remain ``high'' for some time, signaling that the bank is in no rush to lower interest rates as economic growth slows.

``Inflation rates have risen significantly since autumn,'' Trichet said at a press conference in Athens today after the ECB kept its key rate at 4 percent. ``As we have said, inflation rates are expected to remain high for a rather protracted period of time before gradually declining again.''

The ECB is reluctant to follow the U.S. Federal Reserve in cutting borrowing costs as soaring food and energy prices drive inflation above 3 percent in the 15-nation euro region. The International Monetary Fund estimates economic expansion will weaken to 1.4 percent this year from 2.6 percent in 2007 after the U.S. housing slump pushed up the cost of credit worldwide.

``The level of uncertainty resulting from the turmoil remains unusually high,'' even though ``the economic fundamentals of the euro area are sound,'' Trichet said.

The Bank of England also kept its benchmark rate unchanged today. The euro rose to as high as $1.5441 after Trichet started speaking from $1.5313.

Inflation Concern

Consumer prices in the euro area rose 3.3 percent in April from a year earlier after increasing 3.6 percent in March, the most in almost 16 years. The ECB, which aims to keep inflation just below 2 percent, has left rates unchanged since June last year. By contrast, the Fed has cut its main rate seven times since mid-September, to 2 percent from 5.25 percent, in an attempt to fend off a recession.

Trichet said the governing council didn't ``draw particular conclusions from the fact that headline inflation came down,'' and that the current interest-rate level ``will contribute'' to bringing inflation back to the ECB's comfort zone. At the same time, inflation is ``likely to remain significantly above 2 percent in the coming months, moderating only gradually over the course of 2008.''

Thorsten Polleit, chief Germany economist at Barclays Capital in Frankfurt said inflation may not have peaked yet. ``I expect that inflation will even rise to 3.7 percent in August.''

`Imperative'

It's ``imperative'' that elevated inflation rates ``do not become entrenched in longer-term expectations,'' Trichet said.

Inflation expectations, as measured by French inflation- indexed bonds, have risen to 2.37 percent today from 2.19 percent a month ago.

``The inflation outlook appropriately is central to the ECB's policy considerations,'' John Lipsky, first deputy managing director of the International Monetary Fund, said in New York today. ``Policy prospects could shift, however, if inflation expectations remain well anchored and slowing growth reduces inflation pressures.''

The International Monetary Fund in Washington last month cut its global growth forecast and said the world economy faces a 25 percent chance of recession.

Economic data suggest Europe's economy is cooling. Executive and consumer confidence declined to the lowest level in more than two years in April and European retail sales dropped 1.6 percent in March from a year earlier, the most since at least 1995.

Exports from Germany, Europe's largest economy, unexpectedly fell for a second month in March, the country's statistics office said today.

Persistent Tension

Adding to the ECB's concerns, the world's biggest financial companies have posted more than $318 billion in writedowns and credit losses since the start of last year after the U.S. market for subprime mortgages, aimed at people with poor credit histories, collapsed. That has made banks reluctant to lend, pushing up the cost of credit and roiling financial markets.

Trichet said that financial turmoil is ``ongoing,'' even if ``we're observing elements that are in some respects encouraging and seem to show that a number of markets are going progressively back to normal. But it's not unanimous, it's not all the markets concerned. We'll continue to see persistent tensions.''

``Today looks to us like a tiny step toward a more dovish stance to be adopted once it will become clearer that the euro zone will not be immune from the slowdown other economic areas are experiencing,'' said Aurelio Maccario, co-head of European economics at Unicredit Markets & Investment Banking in Milan. ``We stick to our view of a first cut in December.''

Still, the ECB is concerned that companies will raise prices to pass on record raw-material costs and unions will push through bigger wage increases to compensate workers for the higher cost of living, leading to more persistent inflation.

Wage Woes

Wages in Germany, Europe's largest economy, rose 3.3 percent in January from a year earlier, the biggest increase in 12 years. Worldwide, food prices in March were 57 percent higher than a year earlier, according to the United Nations, and oil prices breached $120 a barrel for the first time this week.

Policy makers including Axel Weber and Juergen Stark have said they're not sure rates are high enough to contain inflation.

``We'll monitor very closely all developments in the coming weeks and decide whether the current level of interest rates ensures we'll meet our objective'' of taming inflation, Weber said on April 21.

``Trichet is unlikely to be drawn on anything until the ECB will publish its new staff projections next month which will raise inflation forecasts and cut the growth forecasts,'' said Ken Wattret, chief euro area economist at BNP Paribas in London. ``Trichet will have a lot more explaining to do then.''