UPDATE 1-Trichet says ECB must stay focused on inflation
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BRUSSELS, Jan 23 (Reuters) - The European Central Bank needs to retain its focus on fighting inflation in the face of a very significant, ongoing market correction, ECB President Jean-Claude Trichet told legislators on Wednesday.
"In demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility in already highly volatile markets," Trichet said.
Trichet, speaking to a European Parliament conference on financial supervision, said he was sticking to the ECB's economic outlook, which foresees growth slowing to around 2 percent this year with risks to the downside.
"At this stage I think we have to look at what's happening in the real economy, we have a base scenario and at this stage I'm not going to modify this base scenario," he said.
"Risks are on the downside when it comes to this base scenario. That's nothing new and I have said it in the past. We will see how the real economy develops in the future because it can have an effect on inflation," he continued.
Lessons on financial market supervision needed to be drawn from the financial market turbulence which since August has followed the U.S. subprime mortgage crisis, Trichet said.
"(Although) the present market correction is particularly complex, multidimensional, and ongoing, it seems to me that we know already a number of areas where it is certain that we will have to engineer significant improvements," he said.
Changes are needed to banks' risk management, the Basel 2 framework on how much banks are required to set aside for emergencies, and to incentives for mortgage brokers and others in the home lending business, Trichet said.
Trichet did not discuss the U.S. Federal Reserve's surprise decision on Tuesday to cut its main interest rate by three quarters of a percentage point to 3.5 percent. * For a text of Trichet's opening remarks, published by the ECB, double click here (Reporting by Huw Jones, writing by David Milliken and Krista Hughes; editing by Tony Austin)
