Fears of a sustained downturn in world economies was back on the agenda after Jean Claude Trichet, the president of the European Central Bank, gave warning that the worst of the credit crunch has not passed and the economy was still heading for a “very significant market correction”.

Trichet, who has fiercely resisted following other policymakers by making interest rate cuts, insisted in an interview Monday that acting to restrain rampant inflationary growth was the best way to ensure stability and job security.
Trichet told the BBC: “Price stability and credibility in price stability in the medium term is the best way to have a high level of sustainable growth and sustainable job creation.”
His warning came just days after Trichet told a Lisbon conference that overconfidence by markets in the past had fuelled inflationary pressures.
Trichet said this morning: “These are challenging times obviously. We have this accumulation of the oil shock, the food and agro-products shock. What we say at this moment is not to embark in what we call ’second round’ effects.”
He added: “In the first oil shock when we took the wrong decision, embarking on what I call second round effects, we enshrined a high level of inflation. And we created ... mass unemployment in Europe.”
The ECB is facing a tough economic environment across the euro-zone. Inflation hit a record 3.6 percent in March, against its long-term targeted rate of 2 percent. The price of oil hit a new high at the end of last week, reaching $127.82 on Friday, before falling back this morning to $125.92 in early trading.
Central bankers have to contend with a weak U.S. economy, as well as high oil and commodity prices.
But under Trichet’s leadership, the ECB has held back from cutting its interest rates in the face of the credit crunch.
Trichet has kept the ECB’s key interest rate on hold at 4 percent as his peers in both the UK and America have taken the axe to the cost of borrowing.
Last month, the U.S. cut its main interest rate by a further 25 basis points to 2 percent.
The Bank of England has cut interest rates three times in recent months. The benchmark borrowing rate in Britain currently stands at 5 percent.
Last week Mervyn King, the Bank’s Governor, signaled that rate cuts in the UK, where borrowing costs are now 5 percent, were now looking unlikely, possibly before 2010.
Trichet’s predictions came amid growing indications of a sharp corrections in a number of UK markets.
The Royal Institution of Chartered Surveyors predicted that house prices, sales and consumer spending would all fall in Britain if current conditions persist.
Collins Stewart, the stockbroker and investment bank, cautioned that revenues had fallen by more than a fifth so far this year, driven by weak capital markets here and in America.
(Source: The Times)