ECB Says Interest Rates Are `Still' Appropriate, Price Risks May Increase

The European Central Bank signaled there’s no immediate need to raise interest rates even with inflation seen holding above its limit for most of the year.
“The current key ECB interest rates still remain appropriate,” the Frankfurt-based central bank said in its monthly bulletin published today, echoing President Jean-Claude Trichet’s Feb. 3 policy statement. Inflation risks “could move to the upside” and warrant “very close monitoring.”
Euro-area inflation accelerated to 2.4 percent last month after energy and food costs surged. The ECB, which tries to keep annual price gains just below 2 percent, has signaled concern about faster inflation feeding into wage demands. Economists forecast the bank to start raising borrowing costs from the fourth quarter, a Bloomberg survey shows.
“We continue to see evidence of short-term upward pressure on overall inflation, mainly owing to energy and commodity prices,” the ECB said. “Inflation rates could temporarily increase further and are likely to stay slightly above 2 percent for most of 2011, before moderating again around the turn of the year.”
In its latest quarterly survey of professional forecasters included in today’s report, the ECB said economists predict inflation of 1.9 percent in 2011, compared with a previous projection of 1.5 percent. They predict 1.8 percent for 2012, compared with 1.6 percent before.
The bank in December forecast inflation will average about 1.8 percent this year and 1.5 percent in 2012. It will publish new projections next month.

Second-Round Effects

Trichet last week tempered investor expectations for higher ECB rates after his change in tone on inflation caused a five- cent surge in the euro at the beginning of the year. ECB Vice President Vitor Constancio said on Feb. 4 he’s “satisfied” with the market reaction to the policy statements.
Political tensions in Egypt are stoking oil prices just as German workers are demanding higher wages. Volkswagen AG, Germany’s biggest automotive employer, this week agreed to give 100,000 western German workers a 3.2 percent pay raise to avert strikes at times of record orders.
“We regard it as decisive, absolutely essential, that there are no second-round effects,” Trichet said last week. “We have no way of correcting the immediate increases in oil and commodity prices ourselves, but we have the responsibility of avoiding second-round effects.”
ECB Executive Board member Jose Manuel Gonzalez-Paramo told Spain’s ABC newspaper in an interview published on Feb. 6 that policy makers will have to increase interest rates if inflation doesn’t slow by the end of the year.
Risks to the economic outlook are “still slightly tilted to the downside, while uncertainty remains elevated,” the ECB said. Professional forecasters see growth of 1.6 percent in 2011, up from a previous prediction of 1.5 percent, and maintained their projection of 1.7 percent growth in 2012.
To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net