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ECB's Draghi says inflationary risks could rise

European Central Bank council member Mario Draghi said inflation risks in the euro region could rise in coming months, suggesting he favors further interest-rate increases.

„If you look at the current inflation rate it is below 2%, but there are a series of risks that in coming months, if not confronted, could grow,” Dragi told reporters yesterday after a meeting of finance ministers and central bank governors of the Group of Seven industrialized countries in Essen, Germany. „European central bankers think that they must be strongly vigilant.” ECB President Jean-Claude Trichet on February 8 prepared the ground for a further rate increase next month, vowing to show „strong vigilance” on inflation, a phrase he has used to signal each of the ECB's six rate increases since late 2005. The Frankfurt-based central bank's benchmark rate currently stands at 3.5%. While the G-7 statement said global inflation pressures are „moderating,” Trichet said he is sticking to his message of February 8 that the risks to consumer prices in the euro region are „on the upside.” „Over the past year, Germany as well as the euro region grew at a rate of 2.75% and the underlying growth trend remains intact,” ECB council member Axel Weber said yesterday.

Investors have increased bets on further rate increases beyond March and now expect the ECB to take its main rate to 4% by the end of the year, futures trading shows. The yield on the three-month Euribor contract for December closed at 4.17% on Friday, up from 4.07% on February 5. 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 currency's start in 1999. The ECB has raised rates as higher wage demands and surging liquidity growth threaten to fan inflation. IG Metall, Germany's largest union, this week defied calls for restraint and demanded a 6.5% pay increase for as many as 3.4 million workers. M3 money supply, which the ECB uses as a gauge of future inflation, rose 9.7% in December from a year earlier. That's the fastest pace since February 1990. (Bloomberg)