Jean-Claude Trichet told MEPs on Wednesday that it was “possible” a small increase in interest rates would be made next week to ensure inflationary expectations remained anchored. The European Central Bank President also said speculation was not the “major culprit” behind rising oil and food prices.

Speaking at the second of this year’s four sessions of “monetary dialogue” between the ECB and the Economic and Monetary Affairs Committee, Mr Trichet said the latest inflation projections (3.2-3.6% in 2008, 1.8-3.0% in 2009) represented “a significant upward revision, reflecting higher oil and food prices as well as increasing inflationary pressures in the services sector.” The ECB, he said was “particularly concerned” that these higher rates of inflation “may become entrenched in private inflation expectations and lead to second round effects in price and wage setting.” “It is imperative that all parties concerned contribute to avoiding the emergence of broadly based second round effects,” he stressed.

Speculation not the "major culprit" for high commodity prices

Both José Manuel Garcia-Margallo (EPP-ED, ES) and Robert Goebbels (PES, LU) asked about the role of speculation in causing high oil and food prices. Mr Trichet said the causes were “very, very active demand” from emerging markets, supply constraints and “I wouldn’t say speculation, but the reallocation of global portfolios in the direction of commodities.” It was essential, he said, for markets to function as efficiently and transparently as possible, but “I am not sure speculation is the major culprit.”

ECB not envisaging a series of rate rises

Eoin Ryan (UEN, IE) asked whether a series of rate rises was in prospect if inflation did not fall back. Mr Trichet repeated that the ECB was in “a high state of alertness” and that “we could decide to move rates by a small amount” to control inflationary expectations. But, “I did not say we would envisage a series of increases. We never pre-commit." Responding to Margaritis Schinas (EPP-ED, EL), who asked how interest rate rises would impact on inflation that was largely from external sources, Mr Trichet insisted the key was to avoid second-round effects. To Mr Goebbels, he stressed that his calls for moderation applied not just to the social partners setting wages but to all those, companies included, involved in setting prices.

Market turmoil: avoid pro-cyclical policies, says Trichet

Mariela Baeva (ALDE, BU) asked about the cyclical aspects of economic developments. Mr Trichet pointed out that some aspects of the way markets worked made them magnify the extremes of the business cycle: “Sometimes public authorities act in a pro-cyclical way. If some rules are pro-cyclical, accounting rules, perhaps, or banking and insurance surveillance, possibly, then we may need to attenuate them.”

How best to strengthen financial market supervision?

Ieke van den Burg (PES, NL) and committee chair Pervenche Berès (PES, FR) asked whether the ECB would favour legislation to strengthen financial market supervision in the EU, and notably the three Level 3 committees of national supervisors set up under the Lamfalussy system. Mr Trichet stressed that for him, the first priority was to implement the improvements that had already been agreed upon at EU and international level: “We have a certain level of consensus, some things are agreed. Let’s get them done, and not let discussion of new legislation become an excuse for inaction.” Nevertheless, he promised to consider carefully the proposals in the draft report from Ms van den Burg and Daniel Dãianu (ALDE, RO), which the two rapporteurs had unveiled earlier in the day (see link below).

Plenary debate with ECB in July

Jean-Claude Trichet will debate the ECB's policies with the full Parliament on 9 July in Strasbourg when MEP's consider their views on the central bank's annual report for 2007 in a report by Olle Schmidt (ALDE, SE) - follow the link below for details of the report as adopted by the Committee.