Inflation causes ECB to move interest rates if necessary

The European Central Bank is worried about inflation in the eurozone and ready 'to do whatever necessary' to avoid second-round effects, said ECB on Wednesday.

Inflation risks are clearly oriented and the ECB was ready to counter such pressure, which it would normally do by raising interest rates, ECB president Jean-Claude Trichet said to lawmakers at the European Parliament in Brussels.

The ECB's main interest rate now stands at 4.0 percent as inflation has gone up by 3.1 percent in November, the highest in more than 6 years owing to rising cost of oil and food products.

The ECB has hold its rates steady till now, has been a sharp contrast with U.S Federal Reserve which has already implemented cut rates twice to shun economic slowdown from the subprime crisis.

The period of temporarily high inflation rates would be somewhat more protracted than previously expected, he said, mentioning ECB projections of a range of between 2 and 3 percent for next year.

He added that another threat may arise by possibility of other prices and wages increase as a result of being squeezed by higher consumer prices, creating a second round effect in the economy.

If we had second round effects then we would be in a totally different universe… We will not tolerate second round effects, Trichet said, a clear warning to raise interest rates as such event occurred.

On Tuesday, the ECB made its biggest single injection of cash ever, providing almost $US500 billion for two weeks to help banks get through a crunch sparked by the collapse of the US subprime home loan market.

We are totally separating what we do as regards the monetary policy stance ... and what we do on the money market, Trichet stressed.