Trichet Signals No Room to Cut Rates

European Central Bank President Jean- Claude Trichet signaled faster inflation will prevent a cut in borrowing costs as German business confidence fell to the lowest in almost two years.

The Munich-based Ifo research institute's business climate index, based on a survey of 7,000 executives, declined to 103 from 104.2 in November. Economists expected a reading of 103.8, the median of 38 forecasts in a Bloomberg News survey showed.

Waning sentiment underscores the bind facing central bankers as an economic expansion fades. In testimony today to lawmakers in Brussels, Trichet said the euro-area economy faces a ``more protracted'' period of elevated inflation than previously expected, indicating no imminent plan to reduce interest rates.

The U.S. housing slump has pushed up credit costs worldwide, dimming the outlook for company investment at the same time as a stronger euro makes exports less competitive. Oil prices above $90 a barrel are spurring inflation, sapping company and consumer purchasing power and prompting workers to press for higher pay.

``The ECB is in a very difficult situation. On the one hand you have headline inflation and the way it spills over into inflation expectations, and on the other hand you have a credit crisis,'' said Joachim Fels, co-chief global economist at Morgan Stanley in London. ``Eventually the ECB will be forced into a U- turn and the next move in rates will be down rather than up.''

German consumer confidence dropped to a two-year low last month as inflation is ``poisoning'' spending, research company GfK said Nov. 28. German chemical workers and public employees said they will demand as much as 7 percent more pay next year to compensate for higher living expenses.

At the same time, the euro's 9 percent gain against the dollar this year is eroding export returns.

Airbus SAS Chief Executive Officer Thomas Enders last month called the currency's appreciation ``life threatening'' for the world's largest plane maker and said the company may have to cut its research budget to trim costs.

Trichet Signals No Room to Cut Rates, Bloomberg
12/19/2007 6:39:16 AM