European Central Bank president says higher rates an option to stave off pressures of inflation.

March 9, 2005: 9:22 AM EST

FRANKFURT (Reuters) - The European Central Bank stands ready to raise interest rates to prevent inflationary pressures building whenever that proves necessary, ECB President Jean-Claude Trichet said Wednesday.

"Everybody knows that when action would be necessary, we would embark on action," Trichet told a banking conference.
Inflation expectations have remained remarkably stable, he said, and he gave no indication the central bank saw a threat to its price stability goal at this moment.
But Trichet made clear that credibility on price stability is of the essence, and the central bank stands ready to defend that, as needed, if inflationary expectations start rising. "We express our vigilance," he said.
While the U.S. Federal Reserve has been raising rates at a measured pace since June, the ECB has generally left rates unchanged.
The ECB increasingly has been laying the groundwork for an interest rate hike, warning of potential inflationary dangers from real estate prices, high credit growth and too much cheap money sloshing around the euro zone.
But weak economic growth has stayed its hand. The ECB last week held its benchmark refinancing rate steady at 2 percent for the 21st straight month. Financial markets expect no rate increase until later this year, once growth has solidified.
Some foreign exchange traders said the ECB's readiness to raise rates helped push the euro to a two-month high against the dollar Wednesday, at more than $1.3350.
ECB Governing Council member Nout Wellink also told a newspaper that there would come a time when the ECB would have to act against excess money supply in the euro zone.
Meanwhile, the ECB is stressing its vigilance on inflationary risks, a message designed to assure citizens and markets that it will not allow price pressures to get out of hand while it keeps rates low enough to support recovery.
"The anchoring of medium-, long- and very long-term inflation expectations relies very much... on our own credibility, our credibility over a long period of time price stability. If we were not vigilant, we would lose immediately credibility," Trichet told the conference on European financial structures after EU enlargement.
"If we lose one basis point of credibility, all our medium- and long-term market interest rates would incorporate the loss of credibility, and they would not diminish," he said.

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