Bailout of US mortgage giants 'wise' says ECB chief

European Central Bank president Jean-Claude Trichet today welcomed the US government's decision to rescue mortgage giants Fannie Mae and Freddie Mac.

Mr Trichet said the decision by US Treasury secretary Henry Paulson was justified because of still-turbulent financial markets.

"Had he not taken the decision he took, we would be in a totally different universe," Mr Trichet told the European Parliament's economic and monetary affairs committee.

He said the ECB, like other central banks around the world, would "remain very, very alert, permanently" to prevent turmoil in credit markets and to combat rising inflation.

"We are experiencing an ongoing correction of great, great magnitude with turbulent episodes, the tensions are still there, and this is no time for complacency, that is clear," Mr Trichet said. "In present circumstances, all authorities have to be up to their responsibilities."

He said overall, central banks praised the US move to take over the two mortgage giants.

"The overall reaction was, certainly again not to judge what has been done, but to think that it was in the circumstances which are obviously exceptional, a decision that was welcomed," said Mr Trichet.

He praised efforts by the United States and other actors to take decisions in a "wise and expeditious manner" to limit economic damage of the credit crunch crisis.

Mr Trichet said the euro single currency was helping "considerably to smoothen the pressure" of difficult times that economies in the eurozone were facing. He predicted after a weak second and third quarter growth in the euro-zone, the economy would pick up again in 2009.

He said inflation would likely fall to between 3.4% and 3.6% later this year, and then between 2.3% and 2.9% in 2009.

He predicted gross domestic product growth of between 0.6% and 1.8% next year in the 15 countries that use the euro.

Mr Trichet also called on EU governments to work closely with labour unions and commodity sellers like oil exporters to keep a cap on wages and prices to curb a further rise in inflation.

"It is of the essence that all relevant authorities, price setters and social partners meet their responsibilities," he said.

However, he put the primarily blame for high inflation on soaring commodity prices and said suppliers of energy and other food commodities had a responsibility to cap prices.

"Commodity prices are the main culprit for the global phase of inflation that we are experiencing," Mr Trichet said. "Nobody has anything to gain if we continue to have a high level, certainly not the demand side and certainly not the supply side."

The ECB left its key interest rates unchanged last week, reluctant to move them lower as rising prices offset the fear of weaker growth and recession.