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ECB board members warn on inflation, interest rates

ECB board members warn on inflation, interest rates
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First Published: Tue, Apr 22 2008. 02 58 PM IST
Updated: Tue, Apr 22 2008. 02 58 PM IST
AFP
Berlin: European Central Bank (ECB) governing council member Yves Mersch is surprised that analysts still expect a cut in eurozone interest rates, according to a newspaper interview.
Meanwhile, the head of the French central bank warned that eurozone interest rates could yet rise to stifle inflation.
Mersch, the head of Luxembourg’s central bank, told the Financial Times Deutschland: “I am surprised certain market analysts are contemplating an option that is not called for at all in the current environment - namely an interest rate cut.”
“I urge them to examine the facts that we are looking at,” he added.
Mersch told the paper he expected inflation in the 15-nation zone “probably to remain above three percent until late autumn” and expressed doubt that average inflation in 2009 would reach the ECB’s target of just below two percent.
“You can always hope but whether that is realistic is quite a different question,” he said.
However, the head of the Bank of France, Christian Noyer, who also sits on the ECB’s governing council, said on RTL radio in France that the ECB would change interest rates “if necessary” to reduce inflation to less than 2% next year.
Noyer repeated a warning to business leaders not to increase wages, which could stoke inflation, saying that any increases should be conditional on productivity.
“We are warning all company heads that they must not allow pay, margins, to develop as if inflation were to remain at 3.5%. They must take as a reference our target which is less than 2%,” Noyer said.
Although the US central bank, the Federal Reserve, has slashed interest rates in recent months in an effort to head off a recession, the ECB has kept borrowing rates on hold because of high inflation and despite a strong euro and slowing growth.
ECB critics say the central bank is too focused on fighting inflation and that it could afford to cut interest rates because a slowing economy would automatically have the effect of moderating price increases.
But Mersch disputed this, saying that the changing nature of the world economy was leading to a decoupling of growth from inflation, “particularly when it comes to the timeframe” he told the paper. “That would have possible consequences for monetary policy options,” he said.
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First Published: Tue, Apr 22 2008. 02 58 PM IST