ECB Officials Stress Inflation Concerns

European Central Bank Executive Board members stressed on Tuesday the role of the ECB as a guardian of price stability, giving the strong euro only scant mention.

Juergen Stark told a Portuguese daily the bank's main concern is inflation, which will remain above 2 percent for a few months and Lorenzo Bini Smaghi told a Brazilian newspaper the ECB should work to avoid second-round inflation effects.

Stark told Jornal de Negocios that inflation will "clearly remain" above 2 percent in 2008, although it will approach the 2 percent level at the end of the year.

"The fact that inflation is that high and is expected to remain at an elevated level for a couple of months is our major concern," Stark said in the interview. "We are not happy with this situation."

The ECB sets interest rates with a view to keeping inflation just below 2 percent over the medium term, and has kept its main interest rate at 4 percent since June. Euro-zone inflation hit a record high of 3.3 percent in February as oil prices soared.

Stark said that inflation is high, but that the "current monetary policy stance will contribute to achieve price stability over the medium term and ensures that inflation expectations remain well anchored." 

Bini Smaghi said the central bank would work to avoid higher food and energy prices contributing to a wage-inflation spiral.

"The ECB's priority is to maintain stable prices in the medium term and avoid second-round effects," he was quoted as saying in Monday's edition of the Brazilian business newspaper Valor.
     
Strong Euro

Asked if the strong euro helped the ECB in its objectives, Stark said that the strong currency helps to mitigate the price pressures from gains in commodity prices, but added volatility in foreign exchange markets was not helping.

"Exchange rates should always reflect economic fundamentals and high volatility is not helpful for economic growth," he said.

Bini Smaghi said that euro-zone exports had held up well in recent years despite the rise in the euro, and the trade-weighted exchange rate was more important than bilateral exchange rates.

Analysts said it was striking how little the policymakers said about the strong euro.

"Neither seemed really to give a particular expression of concern about the euro," Barclays Capital economist Julian Callow said.

The euro hit a life-time high of above $1.59 against the dollar on Monday and was trading at $1.5814 on Tuesday.

Bini Smaghi noted that ECB staff had revised down expectations for economic growth in the 15-nation region and said risks were to the downside. "(We see) a certain deterioration in growth prospects for the euro zone," he said.

Stark said that European growth, while projected to be lower this year than in 2008, was still robust.

Still, the main risk to growth is from turmoil in financial markets, he said.

"The major risk to economic growth is coming from the potential impact of the financial market turmoil," particularly via a further tightening of credit standards," he said. "But we also have to take into account other risks, including the sharp increase in commodity prices that might have a dampening effect."