Trichet says ECB inflation view under study

European Central Bank (ECB) President Jean-Claude Trichet attends a debate on the current situation in the markets during the European Parliament's Economic and Monetary Affairs Committee in Brussels August 29, 2011.

BRUSSELS (Reuters) - The European Central Bank is reviewing the risks to price stability, ECB President Jean-Claude Trichet said on Monday, suggesting the bank could tone down its view on inflation pressures and keep interest rates on hold well into next year.

While Trichet said the ECB expected inflation to remain above 2 percent in the months ahead, he avoided saying there were "upside risks to price stability" -- language he used after the bank's last monetary policy meeting on August 4.

"Risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections that will be released early September," Trichet said in a statement to European parliamentarians in Brussels.

In its last staff projections, released in June, the ECB forecast euro zone inflation in a range of 2.5-2.7 percent this year and 1.1-2.3 percent in 2012. It aims to keep inflation just below 2 percent.

A downward revision in the ECB's view of the threat posed by rising prices would relieve any pressure for it to follow up this year's two interest rate rises, taking the benchmark to 1.5 percent, with another hike.

Only a few months ago the majority of economists and investors expected a steady run of ECB hikes, but the recent souring of the economy and intensification of the euro zone debt crisis means rates are now seen on hold well into next year, with an outside chance they may be cut.

Despite gloomy recent data, Trichet said the 17-country bloc was not about to sink back into recession.

"Looking ahead, we continue to see the euro area economy growing at a modest pace in a context of overall relatively sound economic fundamentals for the euro area as a whole."

"At the same time, not least because of the recently re-emerged tensions in financial markets, uncertainty remains particularly high," he added.

RESPONSIBILITIES

Trichet, whose term as ECB President ends at the end of October, also batted away criticism that the ECB had overstepped its mandate by buying the bonds of troubled euro zone members, a measure it reactivated and expanded to Italian and Spanish bonds earlier this month.

"We are very cautious not to go over and above our own responsibilities," Trichet said, referring to the actions the ECB had taken. "We are doing exactly what we judge appropriate for price stability."

There remains a sharp division within the ECB over its bond buying. Germany's Bundesbank, headed by Jens Weidmann, remains particularly opposed to it, arguing it strays into dangerous political territory.

The ECB drastically reduced its bond purchases last week following the recent stabilisation of bond markets, spending 6.65 billion euros (5.88 billion pounds) compared with 14.2 billion euros and 22 billion euros the previous two weeks.

Euribor futures show markets have priced out further interest rate hikes for the next couple of years and also see around a 30 percent chance that the bank may be forced to cut rates early next year.

Annual inflation Europe's powerhouse economy Germany eased to 2.3 percent in August, data showed on Monday, giving the ECB one more reason not to hike borrowing costs any time soon.

Uncertainty remained particularly high in the context of the euro zone's debt crisis and weakened economic prospects in the United States, Trichet said.

To read Trichet's prepared statement to the European Parliament, click on:

here

(Writing by Marc Jones and Paul Carrel; Editing by John Stonestreet/Ruth Pitchford)