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Source: www.afxnews.com

European officials warned Friday that governments must act to curb a possible inflation spiral as record-high price increases risk hurting people on low incomes.

High prices for oil and food pushed inflation to 3.5 percent in March, far above the European Central Bank's guideline of 2 percent.

European Central Bank President Jean-Claude Trichet signaled a determination to keep interest rates on hold, saying "price stability is something which is essential for the poorest and the most vulnerable of our citizens."

"They cannot protect themselves against inflation," he said after he joined euro finance ministers for talks. "It is extremely important that we understand that moderation today is necessary if we want to deliver price stability in the medium term."

The ECB has kept its key lending rate on hold at 4 percent since last June, in contrast to the U.S. Federal Reserve and the Bank of England who have reduced rates several times to encourage banks to lend in the wake of a financial market crisis.

Central banks usually raise rates to increase the cost of borrowing and cool inflation in an overheating economy -- something that is now difficult to do as banks tighten loan conditions, making it harder for businesses to get credit and homebuyers to secure mortgages.

U.S. rate cuts have, however, helped weaken the dollar which has fallen to record lows against the euro, the Japanese yen and other currencies.

Jean-Claude Juncker, Luxembourg prime minister and head of the euro nations' economic group, said a strong dollar was in the United States' interest and "excessive volatility in the foreign exchange markets" was bad for growth "not just in Europe, but globally, too."

The euro's high value has the side-effect of reducing Europe's expensive import bill for dollar-priced oil as world prices hold above $100 a barrel.

The battle against inflation is the main priority for euro nations. Both Juncker and Trichet repeated a call for employers -- including governments -- to keep wage hikes moderate and in line with productivity growth.

This has infuriated trade unions, who say they deserve some of the rewards that companies have reaped from an export boom and Europe's recovery in the last two years.

Some 35,000 workers are expected to protest in the Slovenian capital Ljubljana on Saturday, calling on European officials to back off their demand to cool wages and give them a pay increase in line with growth.

Trichet also turned on automatic price increases linked to the inflation rate, saying they were "a bad thing" that could feed an inflation spiral.

EU Economic and Monetary Affairs Commissioner Joaquin Almunia said the European Commission would likely increase its forecast for inflation this year from 2.6 percent but stressed that he did not see signs of a price spiral so far.

He was more upbeat about growth prospects for the euro currency region than reports that the International Monetary Fund would cut its forecast to 1.4 percent, saying this figure was "on the low side."

But he said he saw more risks of slower growth since February when the EU published its forecast for the euro area to grow 1.8 percent this year and insisted there were positive signs of growth from better economic confidence figures in Germany and France and industrial production statistics.

"We are in a slowdown but growth will be maintained," he said.

Finance ministers and central bankers from the EU's 27 nations are holding two-day talks starting Friday in Brdo pri Kranju, Slovenia to discuss the European economy and how they could fireproof the financial system in the wake of the U.S. subprime banking crisis.

Associated Press Writers Pablo Gorondi and Barbara Schaeder contributed to this report.

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