VIENNA/FLORENCE, Italy -- European Central Bank President Jean-Claude Trichet warned that surprisingly good euro zone growth at the start of the year would not last, but fellow policymakers said on Thursday that this did not mean the ECB could relax its guard on inflation.
Bundesbank President Axel Weber said there was no scope for rate cuts in the face of the likely slowdown, and that higher interest rates were still an option to control inflation, though ECB Executive Board member Lorenzo Bini Smaghi said U.S. debt problems could cause years of slower world growth.
The ECB has faced a tricky environment over past months of darkening growth prospects but accelerating inflation, yet data released earlier on Thursday brought superficially good news.
First-quarter euro zone growth was better than expected, maintaining the 2.2 percent annual rate achieved in the last three months of 2007, and April inflation was confirmed as easing to 3.3 percent from March's record 3.6 percent.
But ECB policymakers said this did not shift their broader expectations of economic weakness later this year and inflation above their 2 percent tolerance limit well into 2009.
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"We are vindicated in our analysis of a resilience, a very significant resilience in the first quarter, and then we will see some kind of slowing down," Trichet said in Vienna at the International Capital Market Association's annual meeting.
"I also had said in the last press conference ... that the second quarter would be less flattering obviously, and that the second semester in comparison to the first semester would also show some kind of slowing down," he noted.
Trichet's comments sparked a drop in the value of the euro against the dollar, but in a newspaper interview published later, Weber dismissed the notion that the growth slowdown might be enough to force the ECB to cut rates.
"I have always stressed that, faced with the current strong upsurge in prices, we should not lose sight of the option of an interest rate increase," Weber told Germany's Frankfurter Allgemeine Zeitung.
"Growth prospects for the euro zone will probably only darken slightly. But at the same time the inflation outlook could get even worse. Against this backdrop, there exists no scope for interest rate cuts."
The ECB has kept rates at 4 percent since last June, and while Trichet said the ECB had been unanimous in its latest decision, most economists polled by Reuters expect the bank to loosen policy in the second half of the year.
"The general message is relatively cautious, not least from Mr Trichet coming after the stronger-than-expected Q1 GDP data, though Mr Weber appears to have reemerged as a hawkish outlier," Barclays Capital economist Julian Callow wrote to clients.
WELLINK WARY ON WAGES
Dutch central bank chief Nout Wellink remained wary about inflation.
"What is important is that higher inflation does not work through to higher wages ... the danger has not subsided," he said in a speech in Amsterdam.
However Bini Smaghi said there were no signs so far of this happening, after he, ECB Vice-President Lucas Papademos and Luxembourg central bank governor Yves Mersch offered a similar growth outlook to Trichet's at various events across Europe.
"It was surprising and above forecast. But we have to expect a more moderate second quarter (and) we have to look at the medium term, beyond quarterly volatility," Bini Smaghi told reporters in Florence about the first-quarter growth data.
Bini Smaghi warned the world economy would take longer than expected to adjust to price spikes and recover from the crisis in risky subprime mortgages, which may slow growth for years.
"It will take time, in particular, for U.S. families to start saving again in a significant manner and to reabsorb part of their debt. In the immediate term that might mean a slower growth rate for several years."
Another durable consequence of the subprime crisis was that cheap credit was now a thing of the past. "It will take time for financial operators to recover confidence," he said.
ECB economists forecast in March that euro zone growth would slow to around 1.7 percent this year from 2007's above-trend 2.6 percent, and that inflation would average around 2.9 percent this year and 2.1 percent in 2009.
External economists now expect 3.0 percent inflation this year and 2.2 percent in 2009, plus 1.6 percent growth both years, according to a quarterly ECB survey published on Thursday.
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