ECB Warns on Inflation, Seeks Bolder Crisis Action

Thursday, 13 Jan 2011 10:40 AM

 

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The European Central Bank's president warned Thursday that inflation may remain high for months, raising questions about the possibility of an eventual interest-rate hike, and urged governments to bolster measures to tackle the eurozone debt crisis.

Jean-Claude Trichet's comments came after the ECB left its main interest rate unchanged at 1 percent on Thursday for the 20th consecutive month.

The decision was expected although annual inflation in the 17-nation eurozone rose to 2.3 percent in December, above its target and a two-year high. The bank's mandate is to keep inflation "close to but below 2 percent."

Trichet said the ECB sees evidence of "short-term upward pressure," mainly owing to energy prices, and inflation could temporarily increase further before returning to target levels later in the year.

That hasn't yet affected the bank's longer-term expectation that price stability will be maintained but "very close monitoring is warranted," he added.

That comment "is intended to signal that for all of the euro area woes, the ECB will not feel manacled to current ... rate levels if price pressures emerge," said Marc Ostwald, a strategist at Monument Securities. "The need to re-price the risk of an ECB rate hike ... is more than palpable."

Still, IHS Global Insight's Howard Archer said he was sticking to the view that the bank won't raise rates until the fourth quarter.

"While the ECB appears to have moved from green to amber on inflation alert, the lights are not flashing red," he said.

Raising interest rates is a tool to combat inflation, but can dampen economic growth. Trichet's comments helped the euro surge to $1.3339 from as low as $1.3089 earlier Thursday.

Data suggest that eurozone growth is maintaining its positive momentum, Trichet said at his post-decision news conference.

However, "the risks to this economic outlook are still slightly tilted to the downside with uncertainty remaining elevated," he said.

The bank, the European Union and the 17 governments that share the euro are struggling to contain a crisis caused by too much state debt in some countries.

Thursday's ECB meeting came amid mounting talk of increasing the powers and size of Europe's 440 billion euro ($570 billion) bailout fund.

The ECB advocates "improvement in quantity and quality, namely in terms of the flexibility of intervention of this fund," Trichet said.

"Everything is urgent in the present circumstances, of course," he said when asked if the need to do so is urgent.

European authorities are trying to reassure bond investors that countries will not default and struggling to keep the interest rates on their debt loads from rising so high they can no longer afford to borrow.

An auction of Portuguese debt Wednesday went fairly smoothly, with many analysts crediting the success to a pickup in the ECB's bond purchases this week. Portugal insists that it doesn't need to follow Ireland and Greece in seeking a financial rescue — though fears remain that it may have to.

On Thursday, Spain and Italy successfully tapped investors for more money.

"I will not comment more on Portugal — I have said, as in all other countries, being ahead of the curve is absolutely essential," Trichet said, without elaborating.

Trichet was tightlipped on the ECB's bond-buying program, which was launched last May.

"It is an ongoing program and I have no other comments on that," he said.

He stressed that the credibility of governments' policies is "decisive" and the ECB encourages them "to be up to their responsibility."

Thursday's meeting of the ECB governing council was the first since the Estonia joined the eurozone on Jan. 1, bringing its membership to 17.

The Bank of England also left its main interest rate unchanged at a record-low 0.5 percent on Thursday despite rising inflation levels in Britain.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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