Euro zone inflation will remain too high for the European Central Bank's tastes for some time but economic growth is set to shrink significantly, ECB President Jean-Claude Trichet said today.
Mr Trichet told a news conference the central bank's interest rate, which it earlier left at 4.25 per cent following a quarter point increase in July, would help meet its inflation target.
"We have no bias," regarding future interest moves, he said.
Underlining the conundrum facing central banks around the globe, Mr Trichet said euro zone inflation was expected to remain above target for a considerable period while growth would be "substantially weaker" than it was in the first quarter.
"Annual inflation rates are likely to remain well above levels consistent with price stability over a protracted period of time and risks to price stability in the medium term remain on the upside," he said.
"Overall, downside risks prevail (for growth)," he said, highlighting high and volatile commodity prices and "ongoing tensions in financial markets".
Financial markets focused on Mr Trichet's comments about weakening growth.
Euro zone government bond and interest rate futures rallied in response as markets unwound expectations for more rate hikes this year.
Euribor interest rate futures were up as much as 6.5 ticks across the 2009 strip, pushing their implied yields lower, while figures derived from Eonia rates wiped out expectations of further interest rate hikes this year.
The euro trimmed gains to $1.5448 from about $1.5490 right before Mr Trichet's comments.
The ECB was determined to keep medium-term inflation expectations in line with its price stability goal of consumer price inflation below but close to 2 per cent, Mr Trichet said.
Euro zone inflation hit a record 4.1 per cent in July. "We continue to monitor very closely all developments," Mr Trichet said.