Trichet Says Policy Is `Still on Accommodative Side'

By Gabi Thesing and Simone Meier

June 6 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said interest rates in the 13 euro nations are still low enough to support economic growth, suggesting the bank sees room to add to today's rate increase.

``After today's increase, given the positive economic environment in the euro area, our monetary policy is still on the accommodative side,'' Trichet said at a press conference in Frankfurt today. ``Acting in a firm and timely manner to ensure price stability in the medium term is warranted.''

The bank raised the benchmark refinancing rate by a quarter- point to a six-year high of 4 percent after increasing its forecasts for economic growth and inflation this year. It was the eighth increase since late 2005 and took the rate to the highest since August 2001.

The ECB has expressed concern that companies will use the strongest period of economic growth this decade to push up prices. Europe's economy grew at three times the pace of the U.S. in the first quarter as companies invested in equipment and hired workers to meet orders from abroad.

``There are very clear hints that the ECB believes it has more work to do,'' said Howard Archer, an economist at Global Insight in London in an e-mailed note.

The euro-area economy will expand about 2.6 percent this year and inflation will average about 2 percent, according to forecasts by the bank's economic staff. That compares with March forecasts of 2.5 percent growth and 1.8 percent inflation.

Trichet said inflation risks remain ``on the upside.''

Euro Retreats

Still, the bank kept its inflation forecast for next year at 2 percent and pared its prediction for growth to 2.3 percent from 2.4 percent. Trichet also dropped a reference to interest rates being ``moderate,'' referring instead to ``favorable'' financing conditions.

That prompted traders to pare bets that the ECB will lift rates twice more this year. The implied rate on the December Euribor contract fell to 4.53 percent from 4.57 percent earlier. That indicates investors see a 50 percent chance of the rate reaching 4.5 percent, compared with around 65 percent odds previously.

The European currency fell as far as $1.3494 and was trading at $1.3501 as of 9:39 a.m. in New York from $1.3524 yesterday.

Trichet cited a 30 percent rebound in oil prices since mid- January as a reason for the downward revision in the growth outlook for 2008. He also said that it was the cause of the ``somewhat higher than expected'' euro-region inflation rate in May, even though at 1.9 percent it was still below the ECB's 2 limit