Dec. 19 -- European Central Bank President Jean- Claude Trichet signaled faster inflation will prevent a cut in borrowing costs as German business confidence fell to the lowest in almost two years.
The Munich-based Ifo research institute's business climate index, based on a survey of 7,000 executives, declined to 103 from 104.2 in November. Economists expected a reading of 103.8, the median of 38 forecasts in a Bloomberg News survey showed.
Waning sentiment underscores the bind facing central bankers as an economic expansion fades. In testimony today to lawmakers in Brussels, Trichet said the euro-area economy faces a ``more protracted'' period of elevated inflation than previously expected, indicating no imminent plan to reduce interest rates.
The ECB ``is not of the view at this stage that the outlook has deteriorated to such an extent that inflation risks can be put to one side,'' said Michael Hume, chief European economist at Lehman Brothers Holdings Inc. in London. Policy makers won't change their rhetoric ``until it becomes much clearer that the credit crunch is having an effect on growth.''
The U.S. housing slump has pushed up credit costs worldwide, dimming the outlook for company investment at the same time as a stronger euro makes exports less competitive. Oil prices above $90 a barrel are spurring inflation, sapping company and consumer purchasing power and prompting workers to press for higher pay.
Growth Cools
Growth in Germany will cool to 1.9 percent next year after 2.5 percent in 2007, the Bundesbank said this week. Investment growth in Germany will probably slow to about 4 percent in 2008 from about 9.2 percent this year, Ifo said Dec. 12.
Borrowing costs have surged as banks hoarded cash following disclosures of write offs linked to U.S. subprime mortgages, which are aimed at people with poor credit histories. Losses stemming from subprime mortgage foreclosures will probably reach $300 billion, the Organization for Economic Cooperation and Development predicted on Nov. 22.
Adding to executives' concern, crude oil reached a record $99.29 a barrel on Nov. 21. German producer prices rose the most in 19 months in November as companies passed on higher energy costs. Consumer-price inflation accelerated to 3.3 percent this month, the fastest pace in 12 years. The ECB aims to keep that rate below 2 percent
``The risks to price stability over the medium term are clearly on the upside,'' Trichet said in Brussels today.
`Difficult Situation'
``The ECB is in a very difficult situation. On the one hand you have headline inflation and the way it spills over into inflation expectations, and on the other hand you have a credit crisis,'' said Joachim Fels, co-chief global economist at Morgan Stanley in London. ``Eventually the ECB will be forced into a U- turn and the next move in rates will be down rather than up.''
German consumer confidence dropped to a two-year low last month as inflation is ``poisoning'' spending, research company GfK said Nov. 28. German chemical workers and public employees said they will demand as much as 7 percent more pay next year to compensate for higher living expenses.
At the same time, the euro's 9 percent gain against the dollar this year is eroding export returns.
Airbus SAS Chief Executive Officer Thomas Enders last month called the currency's appreciation ``life threatening'' for the world's largest plane maker and said the company may have to cut its research budget to trim costs.
``Exports are of course being curbed by the strong euro and this weighs on the mood in our industry,'' Ulrich Lehner, chief executive officer of Henkel KGaA, said in an interview today. ``On the other hand, the weak dollar brings advantages on the cost side'' by lowering import prices.
Some German companies are coping with the euro's ascent. Manufacturing orders rose more than economists forecast in October as foreign sales surged, and the economy ``is still in a solid upswing,'' which will continue for the next two years, the Bundesbank said.
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