ECONOMY

ECB on inflation alert

FRANKFURT – The European Central Bank will raise interest rates immediately if it sees inflation running above its price stability threshold in the years ahead, ECB Governing Council member Nicholas Garganas was quoted as saying yesterday. In an interview with Dow Jones conducted this week, Garganas said the central bank was vigilant on inflation risks against a backdrop of an expected pickup in growth in the 12-nation eurozone and strong money and credit growth. «If we see that we are likely to miss our target of price stability for the next couple of years or so, over the medium term, then we decide to act – no matter what – because this is our message,» Garganas told Dow Jones. «If we feel we are likely to miss our target, then we will act immediately, no matter what. This is how we think, and this is how we make our monetary policy decisions at the council.» The ECB aims to keep inflation below but close to 2 percent in the medium term, but has missed its goal every year since 2000 and staff projections show it may miss it again in 2006 and 2007. Updated staff projections are due in March, and Garganas’s comments broadly back expectations the ECB will also raise its key rates from the current 2.25 percent at its next meeting. «By the time we meet for a rate-changing session at the beginning of March, we should have the forecasts of the ECB staff and we will have a better idea of what the prospects are then,» Garganas said. ECB President Jean-Claude Trichet and Governing Council member Klaus Liebscher have both said market expectations for a March hike are reasonable. Garganas said the council is pragmatic, abiding by its mandate to maintain price stability. Decisions don’t involve «front-loading» interest rates to help the eurozone weather times when rate increases are more difficult, he said. «We don’t look at the distance of the current interest rates (from) some notion of a neutral rate. Nobody knows what that is,» Garganas told Dow Jones. Garganas said economic growth was expected to «become stronger and more solid» and there was evidence of a slow acceleration in consumer spending, the weakest link in the eurozone recovery so far. But if the expansion gained momentum, the eurozone might start expanding faster than its potential growth rate sooner than expected, he said. Faster growth would fan ECB concerns about oil prices feeding through into consumer prices and wages. Among other inflation risks, growth in lending – running at 9.1 percent annually to the private sector in December – was a particular worry for the ECB, Garganas said. The ECB sees the eurozone’s potential growth rate at the lower end of a 2-2.5 percent range. Staff in December forecast real GDP growth in a range of 1.4-2.4 percent in 2006.