December 20, 2007	Thursday	Zilhaj 9, 1428

BRUSSELS, Dec 19: European Central Bank president Jean-Claude Trichet warned on Wednesday that inflation threatened the 13-nation eurozone and stressed that controlled ECB cash injections were meant only to keep credit flowing.

The bank stood ready to fight inflation, he said -- normally by raising interest rates -- while ensuring banks were supplied with cash to ease a credit squeeze that could crimp economic growth.

“I should like to underline -- once again -- that these two responsibilities are clearly distinct and should not be mixed,” Trichet told lawmakers at the European Parliament in Brussels.

“We are not pouring in liquidity,” he added, because funds supplied to commercial banks were paid back within set periods, usually no more than three months.

Trichet’s primary message was that eurozone inflation that hit 3.1 per cent in November, was a “hump” foreseen as prices surged for energy and food products, but which would not last if price moderation was observed elsewhere.

Trichet underscored the danger of a second round effect that would kick in if wages and prices for other goods rose in response to a leap in the headline consumer price index.

“It is essential that the price and wage-setting behaviour remains unaffected by current inflation rates so as to avoid the emergence of second-round effects,” he said.

Lifting wages in response to higher fuel and food prices would lay the foundation for long-term inflation that would hurt employment in the end, Trichet argued.

“If there is an automatic elevation of unit labour costs because of this hump ... you are taking an enormous risk of being progressively in a situation which would be very adverse for growth and job creation,” he warned.

“We will not tolerate second round effects,” Trichet stressed, signalling that the bank would raise its main interest rate of 4.0 per cent if necessary. The ECB chief directed his remarks to those who set prices for both wages and products.

“Our moderation message is not only for the social partners, it is a call for moderation for all price setters.” Meanwhile, he drew a clear distinction between monetary policy as defined by its level of interest rates and operations on the money markets, where the bank has been exceptionally active in the past week.

“We do not mix our two responsibilities. Interest rates depend on the level needed to deliver price stability. This has nothing to do with what might be necessary to care for the proper functioning of the money market,” he said.

On Tuesday, the ECB made its biggest single injection of cash ever, providing almost 350 billion euros ($500bn) for two weeks to help banks get through a year-end crunch.

Annual demand stemming from rising customer cash needs and end of year book-keeping requirements has been made more complicated by the collapse of the US subprime home loan market.—AFP