The fight against rising inflation remains the most important task facing the European Central Bank (ECB), its president Jean Claude Trichet told an audience at the World Economic Forum yesterday. Simon Carswellreports from Davos
Mr Trichet said that even though market turmoil was expected to curb growth in the euro zone, the ECB had to stick to its remit of controlling inflation.
"In demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility in already highly volatile markets."
He said that if the ECB allowed prices to increase it would "do nothing but augment the volatility of the market". He hinted that slower economic growth could stop prices rising and ease pressure on the ECB policy.
Speaking at a session titled "Systemic Financial Risk", Mr Trichet said regulation had to be "permanently upgraded" to the new concepts emerging in the financial markets.
He said that had Basel II rules, which determine how much capital banks must set aside, been introduced "more actively and more expeditiously" on both sides of the Atlantic, some of the difficulties now occurring in the financial markets would "probably have been avoided".
The private sector needed "to discipline itself" and work to benchmark principles that are necessary to try and emulate the "creativity" in the financial markets, he said. "This is no time for complacency in any domain."
A subject of much private debate in Davos this week has been the parlous state of US bond insurers, and the effect their collapse might have on the stability of the financial system. The news on Wednesday that the New York insurance regulator was attempting to organise a bailout was welcomed.
Few bankers were ready to say that the credit woes are over.
Even before French bank Société Générale shocked the markets with news that a rogue trader had lost €4.9 billion, there was a consensus that the economic outlook was worsening and that problems could spread to corporate and consumer loans.
Most participants at Davos believe action is needed to prevent the slump from getting worse. "We don't have to wait to find out whether there is a recession or not," said Scott Freidheim, joint chief administrative officer of Lehman Brothers. "We're in a credit recession and we have to deal with it."
The delegates are largely in agreement that the roots of the crisis lie in the failure of regulators to keep up with financial innovation.
Jamie Dimon, chief executive of investment bank JPMorgan, described securitisation as "a good idea that has gone to excess".
US economist Nouriel Roubini said: "There has been a fundamental change in the financial system because of the emergence of the shadow banking system."
Separately yesterday, Singapore, Norway and Abu Dhabi have been asked by the International Monetary Fund to take the lead in drawing up disclosure benchmarks for sovereign wealth funds, Lee Kuan Yew, the former Singapore prime minister and chairman of one of the world's biggest sovereign funds, has said.
The IMF's move comes as countries with sovereign wealth funds and recipient states skirmished in Davos over the need for a code of conduct for such state-owned investment funds. (Additional reporting Financial Times service)
