ECB chief sees longer period of high inflation in euro zone

    BRUSSELS, Dec. 19 (Xinhua) -- European Central Bank (ECB) President Jean-Claude Trichet said on Wednesday that the euro zone was likely to face a longer period of high inflation than previously expected.

    "The recent substantial increase in oil and food prices, together with unfavorable base effects from energy prices, owing to the marked decline in oil prices a year ago, are having a strong upward impact on inflation in the current context," Trichet told the European Parliament's economic and monetary affairs committee.

    Official figures showed that annual inflation in the 13-nationbloc sharing the same currency euro shot up to 3.1 percent, the highest level in six and a half years and well above the 2percent ceiling preferred by the ECB to maintain price stability.

    Trichet said the inflation rate was expected to remain significantly above 2 percent in the near future, and it was likely to moderate only gradually in the course of 2008.

    "Hence the period of temporarily high inflation rates would be somewhat more protracted than previously expected," he said.

    The ECB has been in a dilemma as to whether to raise its eurozone benchmark interest rate to maintain price stability amid the financial turmoil since this summer. Any further increase might be detrimental to the economy which was already hurt by the volatility on the financial markets.

    In an effort to relieve the credit squeeze resulting from financial turmoil, the ECB on Tuesday pumped almost 350 billion euros (500 billion dollars) into money markets to supply banks with cash they need. It was the ECB's biggest single injection of cash ever.

    Asked whether the ECB's own balance sheet would be affected by its loans to banks to help increase liquidity, Trichet said the ECBwas lending on a short term basis on the same collateral as it has always required.

    "We are not pouring in liquidity, as the loans are paid back too," he said.

    However, Trichet drew a clear-cut distinction between interest rate setting and operations to ensure liquidity in the money markets.

    "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.

    Stressing the ECB would stand ready to counter upside risks to price stability, the ECB chief called on all those involved insetting salaries and prices to act with moderation.

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

    The ECB "will ensure that such second-round effects and risks to price stability over the medium term do not materialize," he added.

    On the euro zone economy, Trichet said the economic fundamentals in the 13-nation bloc remain sound, but growth was likely to slow to around 2 percent in 2008, in line with the region's potential, with risks on the downside.

    The European Commission estimated the euro zone economy would decelerate to 2.2 percent in 2008 from 2.6 percent this year.