Europe Economy

ECB's Mersch Says Need to Consider Rate Rise: FT


The European Central Bank has to ask itself each month whether a rate rise is needed to control inflation, ECB Governing Council member Yves Mersch was quoted as saying in a newspaper report on Tuesday.

The Financial Times Deutschland said Mersch expected the ECB to raise its inflation outlook and trim its growth forecasts in June, but that the International Monetary Fund's growth estimates were too pessimistic.

"At the moment, it's getting ever more likely that we'll have to adjust our inflation projections upward in June," the paper quoted him as saying.

In March, the ECB staff forecast inflation of around 2.9 percent this year, falling to 2.1 percent in 2009, and that growth would slow to 1.7 percent this year before rising to 1.8 percent next year.

The ECB aims for inflation to average just below 2 percent in the medium term, but Mersch was doubtful this would happen next year.

"One can always hope that, but whether it is realistic is a totally different question," Mersch said.

When asked whether the ECB should consider raising interest rates, he replied: "That question is fully justified and these are questions which we have to ask ourselves each month."

The ECB has kept rates on hold at 4 percent since the start of credit turmoil last summer, unlike the U.S. Federal Reserve and the Bank of England, which have both cut rates.

Many economists are edging away from initial expectations that a growth slowdown in the euro zone would allow the ECB to cut rates as a result of record 3.6 percent inflation in the euro zone and tough rhetoric from the central bank.

Mersch also denied that the ECB had underestimated growth risks.

"People are falling into a sense of pessimism that is not backed up by facts
and data. This discussion only contributed to darkening the general mood."

"Probably we're still going to have to reduce our growth forecasts slightly. But I don't see us landing up with the IMF," he added.

The IMF's Europe director Michael Deppler told reporters in Frankfurt on Monday that he stuck by forecasts of euro zone growth of 1.4 percent this year and 1.2 percent next, and said there was scope for the ECB to cut rates as growth and inflation pressure weakened.

Mersch disagreed that lower rates could be on the agenda. "I'm surprised that various market analysts still consider an option that is in no way required in the current environment, namely a rate cut. I call on people to look at the same facts we are looking at."

The stronger euro and money market tensions were not tantamount to a rate rise in Mersch's eyes.

"I don't think you can unequivocally maintain that we might be in restrictive territory," he said.