The European Central Bank is prepared to raise interest rates if needed to bring inflation under control, policymakers said on Tuesday.
French central bank Governor Christian Noyer said the European Central Bank could move rates to make sure that inflation fell below 2% in 2009, while his Luxembourg colleague Yves Mersch said the ECB had to ask itself every month whether a hike was warranted. Their comments are in line with the tough stance against record high inflation expressed by others such as Axel Weber and Klaus Liebscher, which are prompting some analysts to move away from earlier expectations of aggressive rate cuts this year. “Our big problem is to ensure that inflation returns below 2% next year,” Noyer said in an interview with RTL radio. “We will do whatever is necessary for that,” he said. “If needed, we will move interest rates. We are keeping interest rates at 4% at the moment because that seems to us the appropriate level to bring prices back.”
The ECB has held rates for the last 10 months despite moves by the US Federal Reserve, the Bank of Canada and the Bank of England to loosen policy. In an interview with the Financial Times Deutschland, Mersch was also doubtful whether the ECB could bring inflation – which hit 3.6% in March -- under its 2% ceiling in 2009. Asked whether the ECB should consider raising interest rates, he replied: “That question is fully justified and these are questions which we have to ask ourselves each month.” Mersch said he expected the ECB to raise its inflation outlook and trim growth forecasts in June when new staff forecasts are released.
In March, the ECB staff forecast inflation of around 2.9% this year, falling to 2.1% in 2009, and that growth would slow to 1.7% this year before rising to 1.8% next year. “At the moment, it’s getting ever more likely that we’ll have to adjust our inflation projections upward in June,” the paper quoted him as saying.
NO PESSIMISM ON GROWTH
Mersch also denied that the ECB had underestimated growth risks and dismissed the International Monetary Fund’s expectations of 1.4% growth in 2008. “People are falling into a sense of pessimism that is not backed up by facts and data. This discussion only contributed to darkening the general mood.” “Probably we’re still going to have to reduce our growth forecasts slightly. But I don’t see us landing up with the IMF,” he added.
The IMF’s Europe director Michael Deppler told reporters in Frankfurt on Monday that he stuck by forecasts of euro zone growth of 1.4% this year and 1.2% next, and said there was scope for the ECB to cut rates as growth and inflation pressure weakened. (Reuters)