The New York Times-20080124-European Central Banker Says Inflation Is Still Focus

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European Central Banker Says Inflation Is Still Focus

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The president of the European Central Bank gave a full-throated defense Wednesday of the bank's determination to fight inflation, quashing hopes -- at least for now -- that it might follow the United States Federal Reserve in cutting interest rates to contain an economic slowdown.

Jean-Claude Trichet, the central bank president, said the bank, which hinted this month that it might raise interest rates, needed to focus on keeping inflation low, an approach that he argued would help calm increasingly chaotic financial markets.

The stance offered a sharp contrast to the Fed, which has shifted its focus over the last six months from fighting inflation to kick-starting the American economy. The Fed aggressively eased interest rates further in an emergency move Tuesday.

Unlike the Fed, which is required by law to promote employment while keeping prices stable, the European Central Bank's sole role is that of a sentinel against inflation.

Particularly in demanding times of significant market correction and turbulences, Mr. Trichet said in testimony to the European Parliament in Brussels, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility.

European markets sold off sharply on Mr. Trichet's remarks, which damped investor hopes that the bank would follow the Fed's lead. The CAC 40 in Paris and the DAX in Germany closed down more than 4 percent.

The Fed's move, which reflected a dire view of the state of the American economy, raised pressure on the European bank to concede that the slowdown an ocean away would drag down Europe, where the major countries are expected to show slightly softer economic growth after two years of robust performance.

Mr. Trichet did take care to note that slower growth and slackening demand among consumers and corporations could damp inflation. By this logic, if the European economy did weaken, the bank would have room to lower rates.

Early this month, the European bank kept its benchmark interest rate at 4 percent. Mr. Trichet even threatened to raise rates if European labor unions sought pay increases to compensate for higher food and energy costs. Still, financial markets have already assumed that the central bank will follow the Fed later this year.

Through bets on short-term securities, traders have bet that the bank will lower rates beginning in April, and follow through with additional cuts in the summer and autumn. That probably reflects a conviction that the bank is waiting out the early rounds of wage negotiations -- a spring ritual in Europe -- before shifting its stance to accommodate a worsening economic outlook.

The E.C.B. is not really signaling that it will raise rates here, just threatening to -- a bit like having a nuclear weapon, said Julian Callow, chief Europe economist at Barclays Capital in London.

The bank has consistently played down the danger to the European economy posed by weakness in the United States, citing trade within the 15-country euro area and buoyant demand from Asia for euro-zone exports. A rising number of economists in Europe have begun to dispute this view, citing surveys of business and consumer confidence that hint at weaker growth.

The widening difference in interest rates has become fodder for debate at the annual meeting of the World Economic Forum here over whether financial authorities are up to managing both financial market chaos and a worsening economic outlook.

Nouriel Roubini, a professor at New York University, said the European Central Bank had fallen far behind in a world where monetary policy takes up to 18 months to have an effect.

The E.C.B. is still on hold, Mr. Roubini said. I believe they are behind the curve.

C. Fred Bergsten, the director of the Peterson Institute for International Economics in Washington, offered context as well to a slowdown in the world's largest economy. If emerging markets lose one percentage point of growth this year, when an American recession and the credit squeeze are factored in, and rich countries average growth of 1.5 to 2 percent, the result is 4 percent global growth, hardly a lame showing, Mr. Bergsten noted.

It is inconceivable -- repeat, inconceivable -- to get a world recession, he said.