Trichet conceded that inflation was expected to remain above the ECB's target level for a protracted period of time and emphasized that upside stability risks in the medium term were "clearly on the upside and have risen further."

Medium-term price stability was the primary objective, Trichet said, adding that the central bank's monetary stance would contribute to reaching this objective and to fulfilling its price stability mandate.

Trichet also stressed the importance that medium- to long-term inflation expectations remain anchored.

In raising rates on Thursday, the Governing Council also hoped to prevent the materialization of possible second-round inflation effects, Trichet said.

The ECB president also highlighted concerns within the council of price and wage indexing and said this could add to upside inflation pressures. He also said such actions could lead to a wage-price spiral, which would have an adverse effect on employment and competition.

The ECB Governing Council is monitoring price and wage setting behaviour with particular attention, Trichet warned.

In his speech, Trichet conceded that recent data confirmed expectations of "rather weak" GDP growth in the second quarter of 2008. However, he emphasized that it was necessary to evaluate the first two quarters of the year together and that GDP figures were broadly in line with expectations of moderate growth.

Trichet said growth was expected to be moderate, but would remain resilient thanks to emerging markets. He also pointed to data confirming that the underlying rate of money and credit growth remains strong.

Trichet noted that the growth rate of loans to non-financial corporations remains robust despite higher rates, but that household borrowing is slowing.

However, the availability of bank credit has not significantly been affected, he said.

Trichet also said that while annual M3 growth remains vigorous, the M3 figure overstated the true rate of monetary expansion.

During the Q&A period following Trichet's introductory remarks, he said the decision to raise rates was unanimous and that the central bank will do whatever is necessary to deliver on its mandate of price stability.

The primary concern of the euro zone citizens is inflation, Trichet said, adding that there is "absolutely no contradiction" between the ECB's mandate and what the people want.

Trichet pointed to increasing price stability risks and emphasized that the central bank's purpose was to deliver on price stability and anchor inflation expectations.

"Our message is the same since the very beginning," Trichet said.

The ECB president said the central bank needed to be credible in the delivery of its monetary policy and that confidence in the ECB is essential.

In response to a question, Trichet reiterated that economic growth in the second quarter of 2008 will likely not be as strong as the previous quarter. He also suggested that the third quarter would not be very flattering as well as growth risks are on the downside.

However, Trichet also said the central bank's assessment of GDP growth is appropriate and that GDP growth remains dynamic over the medium term.

In addition, he noted that the ECB has only one needle in its compass and that higher inflation expectations translate into higher interest rates.

Nevertheless, Trichet said there is no contradiction between the goals of price stability and economic growth.

Trichet also dismissed the interpretation of "strong vigilance" and "heightened alertness" as code words and emphasized that the ECB will communicate its decisions clearly.

Additionally, Trichet said Thursday's rate increase sent the very important message that the ECB takes the anchoring of inflation expectations "seriously."

"We consider ourselves an anchor of stability and confidence," Trichet said.

Furthermore, Trichet said "absolutely everything is taken into account" when making monetary policy decisions.

Trichet also said it is "necessary to raise rates today" and that euro zone citizens need to know that the ECB is a reliable institution.

The ECB president highlighted that the central bank needs to be as predictable as possible in its actions and that if there is a message to be communicated, the central bank will do so in a clear manner.

By Todd Wailoo, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, This email address is being protected from spam bots, you need Javascript enabled to view it and Stephen Huebl, This email address is being protected from spam bots, you need Javascript enabled to view it

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