Trichet: Need to prevent oil-fed inflation spiral

Reuters

By Anirban Nag

LONDON (Reuters) - The European Central Bank needs to ensure recent oil and commodity price rises do not trigger inflationary problems, the bank's President Jean-Claude Trichet said on Monday, days after signaling a July interest rate hike.

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"In those circumstances, the central bank must prevent increases in the prices of raw materials from being incorporated into the long-term inflation expectations which could trigger second round effects on wages and prices," he said

The ECB left interest rates at 1.25 percent last week but signaled it would raise them to 1.5 percent in July as it seeks to bring uncomfortably high euro zone inflation back in line with its preferred level of just under two percent.

The rest of Trichet's comments were largely a blend of recent speeches. He urged euro zone leaders to come up with tougher new rules to curb the accumulation of sovereign debt and called for debt-strained euro zone members to beef up their fiscal repair efforts.

He added that the euro zone recovery was now more firmly established, although the bloc's near-10 percent unemployment rate remained far too high.

"With the (euro zone) recovery now more firmly established, we have seen in recent months upside risks to the outlook for price stability over the medium term," he said.

"Unemployment at 9.9 percent of the labor force remains much too high, and structural reforms are of the essence to make the euro area economy much more flexible and to elevate its growth potential," he said.

(Reporting by Anirban Nag, writing by Marc Jones in Frankfurt; editing by Patrick Graham/Ruth Pitchford)