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Trichet stands behind interest rate decisions; the particular challenges of the ECB

Exclusive Trichet interview: It is time for banks to start lending again

Q: With hindsight, was it the correct decision to raise interest rates in the summer?

A: The Governing Council of the ECB took an important, and correct, decision to raise interest rates by 25bp in July. Remember at the time that the threat of stagflation was serious. We also observed from market indicators that there was a risk of the un-anchoring of inflation expectations, which was not surprising given the levels of inflation and the price of oil and other commodities.

Even more risky was the attitude of a number of social partners which, given this environment, were considering embarking on second round effects that would have been very damaging to inflation in the medium- and long-term.

As the anchor of stability in the euro nations, it was very important for us to say that we would guarantee price stability in the medium term.

The 25bp increase allowed us to regain control of inflation expectations. With these once again anchored, we were able to take into account immediately the decline of inflation risk due to the worsening of the crisis with appropriate interest rate cuts.

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