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Inflation Worries Top European Bank Agenda

The European Central Bank (ECB) defended its decision to hold interest rates steady, saying the move will help control inflation, which the bank has made its top priority.

Cheese and milk next to money

Prices are rising in Europe

Controlling medium- and long-term inflation remains a top priority for the ECB, the Central Bank President Jean-Claude Trichet said on Monday, April 28.

Even as record inflation has spread across the 15 countries which share the euro, the ECB has held interest rates at 4 percent. As of March, annual consumer prices jumped 3.6 percent in the euro zone due to higher energy and food prices. This is well above the ECB's 2 percent annual inflation target.

"We on the ECB's governing council believe that the current monetary policy stance will contribute to achieving our goal of medium-term price stability and to anchoring medium- and long-term inflation expectations on a lasting basis," Trichet told a congress organized by the Austrian central bank, OeNB.

Safeguarding price stability was necessary for economic growth, job creation and social cohesion, the ECB chief told the conference, which was organized to discuss the first decade of Europe's common currency.

EU Strategy differs from US, Britain

ECB's Jean-Claude Trichet gestures

Trichet is thinking long term

Trichet, along with other leading ECB members, has indicated that the Frankfurt-based bank has no plans to follow the lead of other major central banks in slashing borrowing costs in an attempt to prevent an economic downturn.

The ECB president described the current economic situation as "very challenging" but said he was convinced that Europe can "meet those challenges thanks to its stability-orientated monetary policy strategy."

Both the United States Federal Reserve and the Bank of England have made interest rate cuts in response to global economic and financial market turmoil triggered by the US subprime mortgage market crisis.

German consumer confidence rises

Three women with shopping bags

German consumers saw reasons for optimism

Meanwhile, Germany saw a bump in its consumer confidence, but inflation could hurt long-term gains, experts said.

The widely-watched GfK consumer confidence index climbed to 5.9 points from 4.8 points in March. The poll looked at spending plans, personal income and the economic outlook, all three of which showed improvement in the survey, the results of which were released on Monday.

Decreasing unemployment and substantial pay raises were seen as a reason for the bump.

"The first important wage settlements of this year, which brought employees markedly higher wage increases than in previous years, apparently improved sentiment among German consumers despite the increasing headwind for the German economy," economist Alexander Koch at UniCredit Markets told AFP news agency.

The GfK said controlling inflation would be necessary for long-term consumer confidence. Koch agreed, saying that the upswing was unlikely to signal the start of a spending spree.

"The elevated level of inflation, which is likely to persist in the short term, still weighs heavily on the purchasing power of private households," Koch said.

Germany , Europe braced for slowdown

A Euro sculpture is seen in the autumnal sun in front of the European Central Bank ECB building

The ECB has kept interest rates steady

Several recent business surveys suggested that Germany's economy could be weakening. Growth forecasts for the European Union were also cut by half a percentage point on Monday. The EU economy is expected to grow by 2 percent this year and 1.8 percent in 2009, according to estimates from the European Commission.

Gross domestic product (GDP) growth forecasts were similarly cut to 1.7 and 1.5 percent respectively.

The European slowdown was blamed on turmoil on the financial markets, soaring commodity prices and the poor performance of the United States, Europe's main trading partner.

"Economic growth is moderating in the EU and euro area and the current, imported inflationary pressures are a matter of concern," EU Economic and Monetary Affairs Commissioner Joaquin Almunia said.

Officials in Brussels said that despite the slowdown, the EU economy remained "in a relatively good position to weather the global headwinds" thanks to sound fundamentals.

Its average public deficit was below 1 percent of GDP in 2007, while the EU unemployment rate was expected to drop from 7.1 percent last year to 6.8 percent this year.

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