ECB Hints at Rate Rise if Inflation Stays High

Wage and fiscal policy in the euro zone could buoy inflation and the European Central Bank may need to act on interest rates, ECB policymaker Axel Weber said in a newspaper interview released on Saturday.

"I am concerned that, with regard to the conduct of wage and fiscal policy, the recent temporary heightened inflation rate could be consolidated for longer than is necessary above the tolerance level of the Eurosystem," said Weber, a member of the ECB's Governing Council.

"Should indications of this increase, we must react with interest rate policy," he added in an interview with Germany's Welt am Sonntag.

"We are therefore observing the current wage agreements and finance policy decisions very closely." The ECB has kept interest rates at 4 percent for the last 10 months while the U.S.

Federal Reserve, the Bank of England and the Bank of Canada have cut their benchmark rates in the face of accelerating inflation and uncertainty about the impact of a global credit crisis on the world economy.

Another ECB Governing Council member, Austria's Klaus Liebscher, told Reuters on Friday that no room exists to cut euro zone interest rates and rate rises could not be ruled out.

Weber told Welt am Sonntag: "Our primary goal is price stability." Surging energy and food prices pushed euro zone inflation to a new high of 3.6 percent in March, well above the ECB's target of just below 2 percent.

"We must make sure that inflation expectations remain stable, and that the higher prices now do not lead to higher wages and salaries. Because that would inevitably start off a wage-price spiral," Weber said.

Dubbed a "mega wage year" by Germany's biggest industrial union, 2008 has already delivered the biggest pay rises in 16 years for the public sector and steel workers.

In the last two years, Germany has enjoyed its strongest burst of economic activity since reunification in 1990 and workers want a greater share of the success after years of wage moderation that helped boost firms' profitability.

The pressure for wage rises comes despite widespread concerns that the economy is slowing.

The government expects growth to slow to 1.2 percent in 2009 from 1.7 percent this year, the Frankfurter Allgemeine Zeitung reported on Friday.

Weber said the economy was in solid shape. "The economy in the euro zone and Germany is robust, despite the financial market turbulence," he said.

"We do not see the turbulence on the financial markets leaving a marked impact on the economy in Germany or the euro zone," he added.