By Johanna Treeck

FRANKFURT (MNI) – European Central Bank President Jean-Claude
Trichet on Thursday maintained his overall hawkish tone and said nothing
to reverse the significant shift in rate hike expectations sparked by
his inflation warning last month.

Much as expected, the ECB kept interest rates unchanged and said
they “still remain appropriate.”

While some Council members, including Athanasios Orphanides and
Ewald Nowotny, warned that markets had overreacted when moving rate hike
expectations forward last month to July 2011 from early 2012, Trichet
today did nothing to correct these expectations.

Trichet insisted that “we are very much in line with the judgement,
the assessment we had last month — it’s only three weeks ago.” This
assessment sees inflation risks still “broadly balanced” with the caveat
— repeated today — that they “could move to the upside.”

Although there was no major shift, Trichet’s comments may reflect a
slight increase in inflation concerns.

The introductory statement noted for the first time that price
pressures are “also discernible in the earlier stages of the production
process,” thus signaling worries about early signs of domestic

The statement said that inflation is “likely to stay slightly above
2% for most of 2011,” a slight change from last month’s language. This
suggest that ECB staff forecasts for 2011 inflation, due next month,
will almost certainly be revised upwards from the current 1.8% midpoint,
possibly to above the central bank’s price stability target of close to
but below 2%.

Eurozone inflation has been above the ECB’s price stability target
the past two months, spiking to 2.4% in January from 2.2% in December.
December’s producer price increases suggest that more inflationary
pressures are in the pipeline.

With an upside revision to inflation in the offing, it is perhaps
unsurprising that Trichet dodged the question on whether any of the
ECB’s Governing Council members already believe that inflation risks are
tilted to the upside.

None of this is to suggest that a rate hike is imminent. Trichet
was careful to make sure his comments would not be read as significantly
more hawkish compared to last month. Still, the fact that Trichet also
did not tone down last month’s language suggests that the central bank
is comfortable with current rate expectations.

In the Q&A session, Trichet did not offer any news on how the
central bank plans to progress with non-standard liquidity measures,
only reiterating that all non-standard measures will be “commensurate”
with market tensions.

Trichet confirmed that the problem of banks addicted to central
bank financing — which thwarted earlier attempts to withdraw emergency
liquidity measures — “is certainly an issue which still exists.” Again,
he assured that the ECB is “looking at it very carefully” and that
“addiction should progressively be eliminated.” He did not offer any

Trichet said the ECB’s bond buying program is still in place, even
though the ECB did not purchase any securities last week. He declined to
respond directly to a question about whether the ECB favored allowing
the European Financial Stability Facility to take over the function of
buying bonds – a potential policy shift being mulled behind the scenes
by EU finance ministers and other political leaders.

Next month’s press conference should be more revealing as regards
the ECB’s non-standard measures. The EU governments’ decision regarding
the EFSF, due to be finalized in March, should have progressed
significantly and the ECB must in any event release a new schedule of
liquidity operations and their conditions.

Still, with traditional monetary policy suddenly back on the agenda
and upward revisions to staff forecasts almost certain, inflation will
likely remain the key focus during next month’s meeting.

–Frankfurt newsroom +49 69 72 01 42; Email:

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