ECB Official Won't Commit to Rate Hike Due to Japan Quake

Tuesday, 22 Mar 2011 07:13 AM

 

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European Central Bank Executive Board member Juergen Stark said he can’t commit to raising interest rates in April after Japan’s earthquake increased economic uncertainty.

“Given the heightened uncertainty I cannot make any commitment for the ECB,” Stark said in a March 18 interview with Japan’s Nikkei, a transcript of which was published by the ECB today. “The uncertainty has increased, in particular due to the events in Japan and due to the geopolitical situation in other regions,” he said. At the same time, “there are good reasons to normalize the monetary policy stance.”

ECB officials including President Jean-Claude Trichet and board member Gertrude Tumpel-Gugerell indicated yesterday that the uncertainty caused by the earthquake may not deter them from lifting borrowing costs on April 7. Trichet told the European Parliament he has “nothing to add” to his March 3 remarks, when he said policy makers may raise the benchmark rate from a record low of 1 percent at their next meeting.

Stark said that “for me, the situation in the euro area, with the ongoing economic growth and ongoing threat to price stability, in the short term has not changed.”

The euro dipped on Stark’s comments before recovering to trade little changed at $1.4230 at 10:21 a.m. in London.

Faster Inflation

Inflation in the 17-member euro area accelerated to 2.4 percent in February and has been in breach of the ECB’s 2 percent limit since December. The ECB is concerned workers will demand higher wages to compensate for increased living costs.

Stark said he sees a risk of so-called second-round effects “and it is the task of a central bank to prevent these effects from materializing.”

While the ECB’s own forecasts show that inflation will average 1.7 percent next year, meeting its definition of price stability, the projections “currently factor in market expectations of rising interest rates,” Stark said. “Accordingly, if we did not raise interest rates, the inflation rate could turn out to be above 2 percent at the end of the projection horizon.”

Stark also said the Group of Seven nations stands ready to sell yen again if Japan asks it to.

It is “up to the Japanese authorities to consider this possibility,” he said. “The G-7 finance ministers and central banks expressed their readiness to provide any needed cooperation, and the confidence in the resilience of the Japanese economy and the financial sector. G-7 stands ready to provide any support needed.”

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