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European Central Bank President Jean- Claude Trichet said he's committed to fighting inflation, attempting to quash speculation he'll follow the U.S. Federal Reserve in cutting interest rates after stocks plunged.

“Particularly in demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility,'' Trichet told the European Parliament in Brussels today.

Bond investors dismissed his comments and raised bets on an ECB interest-rate cut. European two-year government notes rose the most since September 2001 and yields on June rate futures dropped as much as 21 basis points. The U.S. central bank cut its benchmark by three quarters of a percentage point to 3.5 percent yesterday after global stocks tumbled on concern a recession in the world's largest economy will curb global growth.

“Europe is not going to get special dispensation from a global slowdown,'' Stephen Roach, chairman of Morgan Stanley in Asia, said on a panel at the World Economic Forum in Davos, Switzerland. “Europe is not this dynamic, rapidly growing economy.''

Euro-region service industries grew this month at the slowest pace in more than four years after credit tightened and the euro neared a record, an industry report showed today.

Room for Maneuver?

Trichet on Jan. 10 threatened to raise the bank's key rate from 4 percent if unions push through wage increases that take the jump in inflation into account. Euro-region inflation was 3.1 percent in December, the fastest in six years and well above the ECB's 2 percent limit.

He suggested today that slowing growth may give the Frankfurt-based ECB more room for maneuver. While the bank is sticking to its base scenario that the economy of the 15 euro nations will expand about 2 percent this year, there are “downside'' risks to the outlook, Trichet said.

“We'll see how the real economy develops in the future because it can have an effect on inflation,'' he said.

That remark “suggests any cut in rates by the ECB will only come on the back of poor economic data,'' said James Nixon, an economist at Societe Generale in London. The Fed's “concerns of a credit crunch appear to be absent in Frankfurt, even though European bank stocks have been hit just as hard as in the U.S.''

European stocks extended declines. The Dow Jones Stoxx 600 Index shed 1.6 percent as of 3:20 p.m. in London, erasing yesterday's gain that was triggered by the Fed's cuts. The index has plunged 15 percent already this year cash advance flexible payments.

Summers Concerned

“The outlook for Europe is being revised downwards quite rapidly,'' former U.S. Treasury Secretary Lawrence Summers in a Bloomberg Television interview in Davos. “One has to be concerned about financial strains and what they bring in Europe.''

European bonds rallied on speculation the ECB will be forced to follow the Fed and cut interest rates. The yield on the two- year note fell as much as 24 basis points, the biggest decline since the day after the terrorist attacks of Sept. 11, 2001, and was at 3.22 percent at 2:49 p.m. in London.

“Trichet's warning about inflation risks today does not mean that he won't cut interest rates in three months,'' said Marco Kramer, co-head of European economics at UniCredit MIB in Munich. “It's only rhetoric to fight inflation expectations.''

BNP Paribas SA today said it now expects the ECB to lower its key rate to 3.75 percent in June rather than September. Barclays Capital said the central bank will reduce rates twice this year instead of keeping them unchanged.

`Difficult Year'

“We're already in a recession in the U.S.,'' Klaus Kleinfeld, chief operating officer at Alcoa Inc., the world's third-largest aluminum producer, said in Davos. “2008 will be a difficult year. I don't think that the world can decouple itself from what's happening in the U.S.''

Still, ECB council member Axel Weber said last night that any impact in Europe from a U.S. slowdown “could emerge with a time lag'' and may “be less strong than in former times.''

ECB Vice-President Lucas Papademos and Executive Board member Juergen Stark also said yesterday that economic fundamentals in Europe remain sound.

European manufacturing unexpectedly maintained its pace of expansion in January. A gauge of manufacturing held at 52.6, beating economists' forecasts for a decline to 52.1, a report from Royal Bank of Scotland Plc showed today.

“Our mandate consists of ensuring price stability for European citizens in the medium term,'' Trichet said. The ECB has to be “credible in guaranteeing price stability.'' Policy makers next meet to decide on interest rates on Feb. 7 in Frankfurt.

Before the Fed's rate cut, the Bank of England was cautious about reducing its interest rates further. Policy makers on Jan. 10 voted 8-1 to keep the benchmark rate unchanged at 5.5 percent, minutes of the meeting published today showed.

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