Tuesday, May 20, 2008

ECB head: Credit crunch 'ongoing'


Jean-Claude Trichet (L) and Robert Peston (R)
Mr Trichet warned against cutting interest rates

The credit crunch is continuing and it is not evident that the worst is over, the head of the European Central Bank has told the BBC.

Jean-Claude Trichet said we were seeing "an ongoing, very significant market correction," during an interview with the BBC business editor Robert Peston.

He warned that if central banks were tempted to cut interest rates now, more serious problems could follow.

He compared recent rises in energy and food prices to the 1970s oil shock.

Mr Trichet said the failure of most European economies to digest tighter monetary policy in the 1970s caused higher wages that undermined the region's ability to compete. The net result was mass unemployment.

He added that we were still fighting unemployment that was a "legacy" of that era.

While the Consumer Prices Index (CPI) has risen sharply, high inflation "will not last forever," said Mr Trichet.

The ECB has kept interest rates at 4% as a result of continuing inflationary pressures, even amid an economic slowdown, and Mr Trichet implied that a cut in interest rates was not on the cards.

Separately on Monday the French Central Bank said it expected the economy to grow by 0.3% in the second quarter, half what it was in the first three months of the year.

You can listen to the interview with Jean-Claude Trichet in "Power Failure at the Central Bank" on BBC Radio 4 on 19 May at 2000 BST

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