Thursday, December 13, 2007

ECB alarmed at rising inflationary pressures

The ECB are becoming increasingly concerned about rising prices in the Eurozone. However, in contrast to other major central banks, it has avoided making things worse by an irresponsible cut in rates.

FRANKFURT (AFP) — The European Central Bank repeated concern Thursday about inflationary pressures in the 13-nation eurozone, a day after saying it would join a coordinated liquidity injection with four other central banks.

A monthly ECB bulletin said its information "confirmed the existence of strong short-term upward pressure on inflation, with the HICP inflation rate reaching 3.0 percent in November." Wording of the bulletin, which referred to the harmonized index of consumer prices, an EU standard measure of inflation, matched that of ECB president Jean-Claude Trichet on December 6, when the bank left its key interest rate at 4.0 percent.

It was released a day after the ECB said it would take joint action with the US Federal Reserve and central banks in Britain, Canada and Switzerland to inject cash and confidence back into chronically tight eurozone money markets.

The action, the first such widely coordinated move since September 11 2001 terror attacks against the United States, involved more than 60 billion dollars (40 billion euros) and was aimed at easing the flow of credit on which global economies depend.

But on Friday the ECB focused on the spectre of inflation, saying in the bulletin that "with money and credit growth remaining very vigorous in the euro area, the Governing Council stands ready to counter upside risks to price stability."

In Belgium, ECB governing council member Guy Quaden said the bank was "seriously concerned" about inflation, which it is mandated to hold close to but below 2.0 percent.

"The current situation is not satisfactory with regards to the inflation rate and the prospects for the short term too are not satisfactory," said Quaden, who is also governor of the National Bank of Belgium.

In France, the national statistics institute INSEE said Thursday that inflation there had risen by 0.5 percent in November from the previous month, the biggest increase since August 2004, and stood at 2.4 percent on an annual basis.

The ECB thus has to deal simultaneously with two issues, ensuring a steady flow of credit to keep the eurozone economy growing, while keeping inflation from spiraling out of control.

High prices for oil, cereals and high-profile food like dairy products have heightened inflation expectations among consumers, which could lead, and already has in Germany, to growing calls for wage increases.

A resulting second round of inflation would represent a structural increase that could last much longer than spikes in oil and food prices normally do, and the ECB has warned repeatedly against such a possibility.

While repeating Thursday that "overall, the fundamentals of the euro area remain sound," the bank stressed: "It is of the essence that no second-round effects materialise via an impact from current inflation rates on wage and price-setting behaviour."