EUROPEAN CENTRAL Bank (ECB) president Jean-Claude Trichet has warned that the end of the credit crunch is not yet in sight.

Europe's top banker also sought to stiffen the resolve of policymakers in the fight against inflation in order to avoid the mass unemployment seen in the 1970s.

The warning that financial markets were still witnessing "an ongoing, very significant market correction" suggests he believes central banks should resist pressure to cut interest rates even if market tensions continue easing and economic growth slows.

Soaring oil and food prices had created "demanding times, challenging times", Mr Trichet said yesterday. The challenge was to prevent such inflationary pressures creating lasting "second-round effects" by feeding through into wage deals. Mistakes made at the time of the first "oil shock" in the 1970s had "enshrined the high level of inflation for a long period of time" and led to mass unemployment in Europe, he said.

Euro-zone inflation, at 3.3 per cent in April, remains above the ECB's target of an annual rate "below but close" to 2 per cent, and euro-zone interest rates have remained unchanged at 4 per cent for almost a year. In the UK, interest rates have been cut three times since last summer, but investors no longer expect any more cuts, as the inflation outlook has darkened on bad figures last week.

Mr Trichet's comments, made in a BBC interview, come as long-term market expectations of UK inflation rise to their highest level in more than a decade, wiping out the gains made since the Bank of England was given the ability to set interest rates independently in 1997 and casting doubt on the credibility of UK monetary policy.

Mr Trichet's cautious outlook was echoed by Warren Buffett, the billionaire US investor, who said yesterday he believed the effects of the financial crisis were far from over. "I think the Wall Street crisis is mostly over, although I don't know," Mr Buffett said in Frankfurt during a four-country tour of Europe. "But I don't think we are halfway or even a quarter of the way through the impact in the general economy."

The crisis was beginning to be felt not just by those who had been "silliest" but also by people "who did sound things", he added. - (Financial Times Service)