European Central Bank council member Axel Weber said he sees a risk of faster inflation, suggesting he’ll back raising interest rates further.
“We have risks to price stability and we said that we’ll counter these risks if appropriate,” Weber said on Friday. “At the moment, I see a risk of stronger inflation ahead, even though the short-term picture looks somewhat benign. I wouldn’t rule out that monetary policy would have to react to counter those risks.”
Friday’s remarks are the latest to suggest that some council members see room to raise rates further after the bank increased the benchmark for a seventh time since late 2005 to 3.75% on 8 March. The region posted the fastest expansion in six years in 2006, raising the risk of faster inflation as companies increase prices and unions demand higher wages.
ECB council member Nicholas Garganas said on Thursday that interest rates are “not particularly high” and that the bank will “act promptly” if needed. ECB council member Yves Mersch suggested the bank may raise borrowing costs at least two more times this year as he told reporters in Luxembourg that rates “would certainly not stop where you believed.”
Investors expect at least one more increase in the key rate this year, futures trading suggests. The implied rate on the three-month Euribor futures contract for December was at 4.1% today. The same as the June contract.
The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB’s benchmark rate since the single currency’s start in 1999.
The ECB has indicated it wants to contain inflation in the 13-nation euro region by removing “monetary accommodation,” taking rates to a level that no longer stimulates the economy. ECB President Jean-Claude Trichet on 8 March called interest rates still “moderate” as opposed to being “appropriate.”
The ECB last week predicted inflation will accelerate to about 2% in 2008.