Trichet Says Worst of Credit Crisis May Lie Ahead

The warning from the ECB's chief Jean-Claude Trichet. that the worst of the credit crunch may lie ahead, deserves to be taken far more seriously than other cautionary warnings. First, he has a reasonably good reading on what is happening with European banks (and our sources with inside connections have maintained for some time that they are in worse shape than is generally acknowledged). Second, he talks to other central bankers. Third, and most important, someone in his position usually understates looming problems so as not to get the public unduly alarmed.

Even with this concerned outlook, Trichet, in stark contrast to Bernanke, is not willing to risk stoking inflation via overly aggressive rate cuts. From the Telegraph:

Jean-Claude Trichet, the head of the European Central Bank, has indicated that the worst of the credit crisis may not be behind us.

Mr Trichet said that we were seeing "an ongoing, very significant market correction."

He compared the recent hikes in energy and food prices to the oil crisis of the 1970s, when higher wages undermined Europe's ability to compete, resulting in widespread unemployment.

He warned that despite the economic slowdown, central banks should not be tempted to cut interest rates because that could lead to more serious problems.

While the Bank of England and the US Federal Reserve have made a series of interest rate cuts since the crisis in the financial markets began, the ECB has held interest rates at 4pc in response to inflation.

In an interview with the BBC today, Mr Trichet implied that the ECB was unlikely to cut interest rates in the short term.

He said however that high inflation "will not last forever."


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