Trichet Not Ready to Cut Rates Even as Risks Mount (Update3)

April 10 (Bloomberg) -- European Central Bank President Jean- Claude Trichet signaled he's still not ready to cut interest rates even as the credit squeeze poses a greater threat to economic growth than policy makers anticipated.

``We are experiencing a rather protracted period of temporarily high annual rates of inflation,'' Trichet said at a press conference in Frankfurt today after the ECB kept its key rate at 4 percent. While financial-market tension may have ``a broader than currently expected impact on the real economy,'' ensuring price stability is ``very serious for us,'' he said.

The Bank of England lowered its benchmark rate a quarter- point today and the Federal Reserve has slashed its benchmark after the U.S. housing slump pushed up the cost of credit worldwide. With euro-region inflation running at the fastest pace in almost 16 years, the ECB is reluctant to follow suit.

``We believe that the current monetary policy stance will contribute'' to bringing inflation under control, Trichet said. ``The firm anchoring of medium- to longer-term inflation expectations is of the highest priority.''

The euro pared gains against the dollar, falling from a record $1.5913 before Trichet spoke to $1.5791 at 5 p.m. in Frankfurt. European government notes advanced.

`It May Take Longer'

The Fed has reduced its key rate by 3 percentage points since September to 2.25 percent, and the Bank of England today cut its benchmark for a third time since December to 5 percent. Still, South Africa and Iceland raised interest rates after inflation accelerated.

``We're still looking for rate cuts from the ECB, but it may take longer than previously thought,'' said Michael Hume, chief European economist at Lehman Brothers International in London. ``We may have to wait six to nine months for the inflation rate to come down.''

Consumer prices in the euro region rose 3.5 percent in March from a year earlier, the biggest increase since June 1992.

The ECB in March raised its forecast for 2008 inflation to about 2.9 percent, which would be the highest annual rate since 1993, according to the International Monetary Fund.

While Trichet predicted inflation will drop below 2 percent in 18 months, he said risks ``remain clearly on the upside,'' including soaring energy and food costs and bigger-than-expected wage settlements.

Wage Increases

In Germany, Europe's largest economy, public-service workers on March 21 won a pay increase that the Ver.di union said is worth 8.9 percent over two years. On Feb. 20, the IG Metall union secured a 5.2 percent raise for 85,000 steelworkers.

``It seems unlikely we will see a change in ECB policy before the summer recess,'' said Julian Callow, chief European economist at Barclays Capital in London. Still, ``Trichet had a less hawkish tinge than I expected.''

The IMF said this month there's a 25 percent chance of a world recession, with losses stemming from the worst financial crisis in the U.S. ``since the Great Depression'' estimated to approach $1 trillion. Banks and securities firms so far have posted $232 billion in asset writedowns and credit losses.

The IMF lowered its forecast for economic growth in the 15- nation euro region this year to 1.4 percent from 1.6 percent and said inflation will slow to 1.9 percent next year. The ECB, which aims to keep inflation below 2 percent, ``can afford some easing'' of interest rates, the fund said.

While Trichet acknowledged an ``unusually high'' level of uncertainty, he said ``the economic fundamentals of the euro area are sound.''

Investors have reduced bets on lower ECB rates this year, futures trading shows. The implied rate on the Euribor futures contract maturing in December was at 4.10 percent after the ECB's decision today, up from 3.31 percent on Feb. 11.