ECB president says worst of credit crunch still to come

European Central Bank President Jean-Claude Trichet warned that the economy is in for a “very significant market correction” and stressed that the worst of the ongoing credit crunch is still ahead. Trichet also said striving to restrain inflation through interest-rate decisions is the most effective way to ensure job security and economic stability. “Price stability and credibility in price stability in the medium term is the best way to have a high level of sustainable growth and sustainable job creation,” Trichet told the BBC.

Jean Claude Trichet warns of ‘very significant market correction’

Fears of a sustained downturn in world economies was back on the agenda today after Jean Claude Trichet, the president of the European Central Bank, gave warning that the worst of the credit crunch has not passed and the economy was still heading for a “very significant market correction”.

Mr Trichet, who has fiercely resisted following other policymakers by making interest rate cuts, insisted in an interview today that acting to restrain rampant inflationary growth was the best way to ensure stability and job security.

Mr Trichet told the BBC: “Price stability and credibility in price stability in the medium term is the best way to have a high level of sustainable growth and sustainable job creation.”

His warning came just days after Mr Trichet told a Lisbon conference that overconfidence by markets in the past had fuelled inflationary pressures.

Mr Trichet said this morning: “These are challenging times obviously. We have this accumulation of the oil shock, the food and agro-products shock. What we say at this moment is not to embark in what we call ’second round’ effects.”

He added: “In the first oil shock when we took the wrong decision, embarking on what I call second round effects, we enshrined a high level of inflation. And we created … mass unemployment in Europe.”

The ECB is facing a tough economic environment across the euro-zone. Inflation hit a record 3.6 per cent in March, against its long-term targeted rate of 2 per cent. The price of oil hit a new high at the end of last week, reaching $127.82 on Friday, before falling back this morning to $125.92 in early trading.

Central bankers have to contend with a weak US economy, as well as high oil and commodity prices.

But under Mr Trichet’s leadership, the ECB has held back from cutting its interest rates in the face of the credit crunch.

Mr Trichet has kept the ECB’s key interest rate on hold at 4 per cent as his peers in both the UK and America have taken the axe to the cost of borrowing.

Last month, the US cut its main interest rate by a further 25 basis points to 2 per cent.

The Bank of England has cut interest rates three times in recent months. The benchmark borrowing rate in Britain currently stands at 5 per cent.

Last week Mervyn King, the Bank’s Governor, signalled that rate cuts in the UK, where borrowing costs are now 5 per cent, were now looking unlikely, possibly before 2010.

Mr Trichet’s predictions came amid growing indications of a sharp corrections in a number of UK markets.

The Royal Institution of Chartered Surveyors predicted that house prices, sales and consumer spending would all fall in Britain if current conditions persist.

Collins Stewart, the stockbroker and investment bank, cautioned that revenues had fallen by more than a fifth so far this year, driven by weak capital markets here and in America.