ECB officials warn of commodity price danger

By Swaha Pattanaik and Wojciech Moskwa

PARIS/OSLO (Reuters) - European Central Bank policymakers warned about the danger higher food and energy prices pose to inflation and said they were also keeping a close eye on turbulent financial markets.

ECB President Jean-Claude Trichet, speaking the day after the bank held rates steady at 4 percent, said unmet demand from emerging markets was to blame for food price rises that have pushed inflation to a record 3.2 percent high in the euro zone.

"The current surge in commodity prices, including food more recently ... reminds us that globalization can also lead to upside risks in world inflation," he said at a Bank of France conference in Paris.

Bank of France Governor Christian Noyer said higher commodity prices were a long-term trend.

"The growth of emerging market economies ... are leading to a surge in the demand for natural resources, food, and energy, which logically has a strong and permanent impact on inflation."

The ECB is currently caught in a policymaking dilemma, as high inflation gives it little scope to cut rates in response to increasing signs of a spillover from the housing-led slowdown in the United States.

German Bundesbank President Axel Weber said that even with the falls in food prices assumed in Thursday's new ECB staff forecasts -- which the bank's rate-setting Governing Council does not formally endorse -- inflation looked set to be above target into next year.

"The current inflationary outlook and the medium-term upside risks are our major concern," he told a Norwegian central bank conference.

"Weaker growth prospects do not pose sufficient reason to expect a dampening of inflationary pressures in the foreseeable future," he said.

ECB Vice-President Lucas Papademos said later that inflation developments had been unsatisfactory and that the ECB was committed to thwart any wage-price spiral emerging.

INFLATION EXPECTATIONS RISING

Bond markets showed investors' long-term inflation expectations were rising, but some in the markets were still too complacent about price dangers, Weber said.

"There seems to be some underestimation of inflation risks in the market. We made clear by publishing our staff forecast that we do see persistent and prolonged inflation risks," he said. "For me, the way forward (for monetary policy) is pretty clear."

By contrast, most private-sector economists expect the ECB to cut rates to 3.75 percent by the end of June and at least once more later in the year, despite Trichet's efforts to play down such hopes on Thursday.

Weber said the euro zone growth slowdown that started in the last three months of 2007 seemed to be continuing but economic activity should start to return to its long-term trend in the second half of this year.