Rising food demand could drive inflation: ECB interview

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European Central Bank head Jean-Claude Trichet warned Wednesday that food prices could keep rising due to increasing demand from emerging countries and proposed a global effort to boost harvests in Africa.

Changing consumption patterns in large emerging countries have fuelled food prices and "it is quite possible that this will continue for a while longer," Trichet told the German weekly Die Zeit in an interview.

"At the same time, there are huge expanses of land in Africa which could be used for agricultural purposes," Trichet added. "We need to provide the right incentives for African farmers in this respect."

He called the situation "an important global issue which should be taken up by bodies such as the G20" group of developed and emerging economies.

Higher prices would not force the ECB to raise interest rates but the bank would focus on avoiding "second-round effects" whereby high oil and food prices are transformed into generalised inflation.

It would watch in particular for signs of "a wage-price spiral," Trichet said.

Countries where economic activity is pushing inflation to levels that have begun to ring alarms, as is the case in Germany, should adopt "more restrictive" policies "to avoid the economy overheating or speculation getting out of control," Trichet said.

He noted that "Germany has also succeeded remarkably well in regaining its competitiveness over the last 10 years (and was) ... now reaping the rewards of its patient efforts."

But the ECB president cautioned that German output had not yet returned to levels seen before the global financial and economic crises.

He commented on a pact of competitiveness proposed by France and Germany by saying: "If its aim is to improve the functioning of the economic union through greater coordination and integration, we will support it."

But Trichet also noted that eurozone countries were "still discussing the reform of their Stability and Growth Pact and the other elements of economic governance," issues that have been hard to resolve so far.

The ECB president downplayed notions that some Germans were becoming more sceptical of the 17-nation eurozone because they might have to provide substantial financial support for weaker members in the coming years.

"Deep down, everybody is aware of the importance of our historic project," he said.

Trichet spoke a few days after German central bank president Axel Weber decided not to seek another term, effectively ruling him out as a successor to Trichet as head of the ECB later this year.

That has raised concern that Germans could lose faith in the ECB's determination to keep inflation under control.

Trichet did not comment at length on Weber's decision, saying only that he respected it.

© 2011 AFP

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