European Union

ECB Warns Price Pressures Are 'Alarmingly High'


Euro zone price pressures are "alarmingly high," threatening medium-term price stability, and first quarter growth in the bloc could exceed expectations, European Central Bank officials said on Friday.

Governing Council member Axel Weber said euro zone interest rates at 4.0 percent would help anchor inflation expectations at a low level -- one of a clutch of statements by ECB policymakers which appeared to mitigate against early rate cuts.

"Not only are current price pressures alarmingly high but, faced with moderate though basically robust euro zone economic growth, and the continued strong money supply expansion, there are medium-term upside risks to price stability," Weber said.

The euro (EUR-) jumped against the dollar on his comments, adding to investor conviction that unlike in the U.S., euro zone interest rates are not set to come down any time soon.

ECB Executive Board member Juergen Stark told a conference in Cape Town that first quarter economic growth in the euro zone was likely to be better than expected, adding: "In our view the fundamentals in the euro area are sound."

He noted the euro zone had no major imbalances, company profitability was good and the labour market was improving.

Weber, who is also chief of Germany's Bundesbank, said in a speech in Luxembourg that curbing inflation expectations was all the more important given the turmoil in financial markets.

In a rare comment on the euro's exchange rate, Weber criticized the recent surge in the value of the single currency saying the volatility of the exchange rate was excessive.

"The euro, just recently, is excessively volatile, like many other financial market prices, stock markets. We are in an environment of heightened and excessive financial market volatility," Weber said.

The euro hit all time highs against the U.S. dollar on March 17 at just above $1.59 having risen 8 percent against this year alone after a 12 percent throughout 2007.

The ECB sets interest rates with a view to keeping inflation just below 2 percent over the medium term, and has kept its main rate at 4 percent since June.

No Room for Complacency

Euro zone inflation hit a record high of 3.3 percent in February as oil and food prices soared and economists polled by Reuters expect inflation at 3.3 percent also in March.

The European Union's statistics office Eurostat will publish the March inflation estimate on Monday but data released by German states on Friday showed inflation in Europe's biggest
economy probably accelerated in March.

Also inflation in Belgium, seen as a bellwether for the 15-member euro zone, hit 4.4 percent year-on-year in March --its highest rate in 23 years.

"For us on the Governing Council of the ECB the current inflation rate of 3.3 percent and the prospect that the inflation rate will remain clearly above 2 percent in the remainder of 2008 is for us a matter of particular concern," Stark said.

"There is no room for complacency and no reason to believe inflation has been brought under control," he said. "The ECB remains firmly focused on price stability."

Markets expect the ECB to start cutting rates later this year as the euro zone economy slows under the combined weight of a stronger euro, rising oil prices, more expensive market credit
and a sharp slowdown or even a recession in the United States.

On the German economy, Weber said economic growth this year was likely to fall short of the Bundesbank's December forecast of 1.6 percent because of the cooling U.S. economy, higher oil prices, stronger euro and the impact of the financial market turmoil on the real economy.

"On account of this, from today's viewpoint we must make certain cut backs to our December forecast," he said.

However, Weber said there was no need for pessimism about Germany's growth prospects as industry was in robust shape and improved labour market conditions should have an increasingly positive impact on consumer demand. "There is no crisis among German credit institutions," he said.