The European Central Bank must avoid commodity price rises feeding through into longer-term inflation expectations and is "carefully monitoring" the situation, ECB President Jean-Claude Trichet said on Thursday. Upside risks to the medium-term outlook for price stability had emerged in recent months as the economic recovery took hold more firmly, with strong rises in oil and other commodity prices having a strong impact on headline inflation, Trichet said.
"Once more, we have to avoid commodity price increases becoming entrenched in longer-term inflation expectations, which could have second-round effects on wages and prices," he said in the text of a speech on 'The ECB's response to the crisis'. "We are carefully monitoring the situation and we stand ready to do whatever is necessary to fulfil our mandate - just as we have done over the past twelve and a half years," he added in the speech, for delivery in Berlin.
Eurozone inflation accelerated to 2.8 percent last month - well above the ECB's target of just below 2 percent. Financial markets expect the Frankfurt-based bank to raise interest rates to 1.5 percent in July to counter firming price pressures. The ECB left rates unchanged at 1.25 percent earlier this month, after raising them in April to end two years of crisis-induced loose policy.
Trichet stressed the separation between the ECB's monetary policy and its non-standard measures, which include its liquidity operations. "Let me emphasise that our non-standard measures do not in any way impinge on our capacity to tighten our monetary policy stance in response to inflationary pressures."