BASEL, Sept 8: Central banks must be on alert for risks from the global credit crisis and the US government bailout of ailing US mortgage giants Fannie Mae and Freddie Mac is welcome in this regard, the Group of 10 said on Monday.

At the same time, they must also watch the threat of rising inflation, European Central Bank head Jean-Claude Trichet said as the spokesman for the G10 central bankers meeting at the Bank for International Settlements (BIS).

“We still see the (financial crisis) continuing and still consider that we all have to be alert. The risks are still there and alertness is essential,” Trichet said.

World financial markets have been in turmoil since the collapse of the US subprime or higher-risk mortgage sector last year.

In the fallout, the credit essential for business has virtually dried up as the banks have been hit by billions of dollars in losses on their subprime exposure.

Over the weekend, the US government took control of Fannie Mae and Freddie Mac, who together back nearly half of all US mortgage finance, saying the risk of their failure for the economy was, too, great to be safely ignored. Trichet said the US action was welcome.

“We took note of the decision to rescue Fannie Mae and Freddie Mac; it was a very important decision and ... a welcome decision taken on account of the circumstances,” he said.

The move sent European and Asian stock markets soaring on Monday as investors greeted the news with a massive relief rally, posting gains of three per cent and more.

Trichet also warned that inflation was at a “very high” level and called for unions to be restrained in wage demands so as to limit any follow-through, secondary price pressures from stoking higher costs.

“We all agree that a solid anchoring of inflation expectation is of the essence in the present, we have to avoid that social partners engage in any kind of spiralling (of salary and price demands),” he said.

Overall, Trichet said world economic growth remained “positive and significant” although some slowing down has been observed.

Emerging economies, whose resilience has been central in propping up the global economy, were also showing “some kind of slowing down.” However, this slowdown was coming “from a very elevated level,” he added, saying that the resilience of emerging economies “remains substantial.”

The ECB last week slashed its eurozone growth forecast for 2008 to 1.4 per cent from 1.8 per cent and cut its 2009 estimates to 1.2 per cent from 1.5 per cent.

In turn, it raised its 2008 eurozone inflation forecast to 3.5 per cent from 3.4 per cent previously, with 2009 put at 2.6 per cent, up from 2.4 per cent.—AFP