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Price Stability Key To Econ Growth, Financial Stability

Thursday, January 24, 2008

Trichet: Price Stability Key To Econ Growth, Financial Stability

DAVOS, Switzerland -(Dow Jones)- Price stability is critical to economic growth and the smooth functioning of financial markets, European Central Bank President Jean-Claude Trichet said Thursday.

These responsibilities "call for the appropriate monetary policy stance," he said during a panel discussion at the World Economic Forum in Davos, Switzerland.

"There is one needle in our compass, which is price stability," he added.

The ECB currently faces an increasingly severe dilemma: euro-zone inflation is rising while economic growth is slowing.

The bank so far has kept its key rate steady at 4.0%. The U.S. Federal Reserve, by contrast, has used steep interest rate cuts, including a 75-basis-point move Tuesday, to stave off a looming recession.

Trichet noted that now is "no time for complacency" in preserving price stability and the smooth functioning of money markets.

Financial-market turmoil continues to rock global markets, with banks incurring huge losses stemming from bad subprime loans in the U.S.

Trichet described this crisis as a "significant" market correction, noting that there had been a severe underpricing of risks in the run-up to this crisis. He added that pro-cyclical policies that can create bubbles, must be eliminated to preserve financial-market stability.

The current crisis also shows the need for better risk management and ratings in the financial sector, Trichet said, adding that new regulations and voluntary measures from the private sector were needed.

"We have to accept that regulation has to be permanently upgraded...up to the new concepts that are emerging out of the creativity and the (inventions) of the financial markets," he said.

Trichet said the private sector should help eliminate risks to financial markets and suggested that a voluntary code of conduct could be established.

Posted by MOHAMED SAID at 10:58 AM  

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