The European Central Bank is determined to prevent higher oil and food prices driving up inflation more broadly, President Jean-Claude Trichet said today.
Mr Trichet appealed to employers, employees and firms to resist the temptation to raise wages and prices in line with a current spike in consumer price inflation.
The ECB would not hesitate to act if needed to head off a wage-price spiral, he said, although he gave no indication that any change in euro zone interest rates from the current 4.0 per cent was imminent.
"We are here to tell you we will not tolerate second round effects," Mr Trichet told the European Parliament's Economics and Monetary Affairs Committee.
Headline inflation hit its highest level in six and a half years in November at 3.1 per cent, and Mr Trichet said it was likely to ease only gradually next year. His remarks stuck closely to the statement made after the ECB's last rate meeting on December 6th when policymakers surprised investors by discussing a rate rise before opting for no change.
Economic fundamentals were still sound but growth was likely to slow to around 2 per cent in 2008, in line with the region's potential, with risks seen to the downside, Mr Trichet said.
In Vienna, ECB Governing Council member Klaus Liebscher said insecurity about the economic impact of financial market turbulence would continue.
"In general, the downside risks to growth forecasts have increased," he told a news conference. Mr Trichet said the ECB's credibility in fighting inflation would help to ensure that what should be a temporary rise in inflation caused by higher commodity prices is not reflected in higher wage demands and consumer goods price rises. But the ECB would take more concrete action if needed.
"By acting in a firm and timely manner on the basis of its assessment, the Governing Council will ensure that such second-round effects and risks to price stability over the medium term do not materialise," Mr Trichet said.