BoG boss sounds inflation alarm

Garganas says high pay raises and inadequate competition undermine the country’s current account

Bank of Greece Governor Nikos Garga-nas addressing shareholders, probably for the last time, yesterday.

Greece’s central bank yesterday reiterated concern over the impact of rising inflation on the country’s competitiveness but said the economy will continue growing at higher rates than the rest of the eurozone in the short term, despite a slowdown.

In what is probably his last annual report to shareholders, Bank of Greece Governor Nikos Garganas, whose term expires in June, put the blame for rising inflation on higher oil prices, high pay rises and the presence of cartels in many markets.

The harmonized inflation rate for this year was revised to 4.0 percent from 3.4 percent previously.

“Some fears... especially regarding the rising price of oil and the rising cost of labor look like being realized,” Garganas said. “For this reason, inflation will be higher than what we had originally forecast and we expect it to be about 4 percent.”

Garganas proposed that wages should be either frozen or granted limited rises. He also said that the government’s recently announced measures to promote competition were inadequate.

“The measures target the symptoms, not the causes of the problem. In markets where certain enterprises have a dominant position, the acceleration of inflation was faster than in the more competitive sectors,” he said.

Garganas revised the country’s 2008 GDP growth forecast down to 3.5 percent, from a previous estimate of 3.7 percent in February.

He noted that growth is mainly based on consumption, which in is turn fueled by credit expansion.

“By contrast, the external sector of the economy has a negative share in growth, as exports lag imports considerably, as a result of low competitiveness,” Garganas said.

He said Greece’s current account deficit in 2008 was seen as steady or higher than last year’s 14.1 percent of GDP figure.

“The prospects of cutting the current account deficit in the next few years are not auspicious and the deficit is seen as staying stable as a percentage of GDP in 2008, and may even increase,” he said.

Garganas also said the central bank favored mergers and acquisitions in the Greek banking sector. He called on banks to improve the quality of their loan portfolios, and on households to make careful appraisal of their ability to repay before borrowing.

Garganas also welcomed the recent social security reform but said more reforms would be needed.

Asked to respond, Employment and Social Security Minister Fani Palli-Petralia said, “Policy is determined by the government and the prime minister.”

She also said the reduction through merger of the multitude of social security funds, as envisaged by the reform, will be carried out by the end of the year.