FRANKFURT (MNI) – Core inflation, which excludes energy and food
prices, is not a reliable indicator of future price pressures, ECB
President Jean-Claude Trichet said in an interview with the Wall Street
Journal released on Sunday.

Current interest rates remain appropriate and the ECB currently
sees no second-round inflation effects materializing, but it is closely
monitoring price developments, Trichet told the paper.

“We consider that core inflation is not necessarily a good
predictor for future headline inflation,” Trichet said.

“That being said, all central banks, in periods like this where you
have inflationary threats that are coming from commodities, have to go
through the hump and be very careful that there are no second-round
effects,” he said.

Trichet said that “at this stage” the central bank sees no second-
round effects. “And everybody knows we would not let second-round
effects materialize. We will continue to deliver price stability,” he
asserted.

The Eurozone’s December headline inflation figure exceeded the
ECB’s price stability target of close to but below 2% for the first time
in over two year, hitting 2.2%. Core inflation, on the other hand, was a
far more benign 1.1%.

Trichet reiterated that current ultra-low interest rates of 1% are
“appropriate,” but he stressed that refinancing costs for troubled
periphery countries would not keep the central bank from raising
interest rates if necessary.

“All countries in the euro area have an immense stake in the solid
anchoring of inflation expectations, because medium and long-term
interest rates incorporate future inflation expectations,” he said.

Earlier this month, Trichet surprised markets with hawkish tones on
inflation. Reading the ECB’s introductory statement at his monthly press
conference, he warned that while inflation risks are still broadly
balanced they “could move to the upside.”

In Sunday’s interview, Trichet reiterated that the ECB could hike
rates before unwinding all non-standard tools. “We are disconnecting
both measures. We can move interest rates on the one hand, and we can
move non-standard measures on the other hand independently,” he said.

The ECB president also hinted that the bank could be relieved of
its controversial government bond-buying program should governments
indeed decide to expand the role of the European Financial Stability
Facility (EFSF) to include the purchase of government debt.

“As all our non-standard measures, the securities purchase is
indeed meant to help restore a better transmission mechanism of our
monetary policy. It is clear that if markets are functioning better more
generally then we have less problems in the transmission of monetary
policy,” Trichet said.

He stressed that governments still have “to improve the
stabilization fund in both quality and quantity. By quality I mean
having a tool that is as flexible as possible.”

Asked about major concerns for 2011, Trichet said that, “because we
managed to avoid a depression and are now experiencing the recovery, we
could lose momentum in the reforms that are still urgently needed. That
is the main danger.”

On the other hand, he dismissed concerns that austerity in Europe
could become a brake on growth. Quite to the contrary, sustainable
public finances boost confidence and foster growth, Trichet argued.

–Frankfurt bureau; +49-69-720142, jtreeck@marketnews.com

[TOPICS: M$G$$$,M$EC$$,MFX$$$,MGX$$$]