ECONOMY

Garganas wary over prices

FRANKFURT – Inflationary risks in the eurozone are worsening in an economy growing at a 0.6 percent quarterly rate, European Central Bank (ECB) Governing Council member Nicholas Garganas told Reuters on Thursday. In remarks that left little doubt that he would favor another interest increase on August 3, Garganas said the buoyant pace of growth is likely to continue well into next year and the ECB must keep inflationary expectations in check. «It is absolutely essential to act without delay, if the data warrant it,» he said in an interview. Economic data received since the ECB’s July 6 meeting – when it held its benchmark rate at 2.75 percent but put markets on alert for an August hike – confirm that the eurozone is on track for broad-based and sustainable economic growth, he said. »It has been quite buoyant. Everything goes pretty much as we had expected, and I expect real GDP (growth) around potential for the remainder of the year and perhaps a little above potential with the output gap narrowing somewhat.» «I would not rule out» growth of 0.6 percent in the third and fourth quarters of 2006, said Garganas, who is the Greek central bank governor. While it is too early to be sure whether this could be sustained in 2007, he added, «My view is that growth is broadly sustainable for the next year or so at the current rate.» The eurozone economy expanded at a 0.6 percent pace in the first quarter and looks set for a similar performance in the second quarter, pointing to annual growth above 2 percent. Garganas cited improved retail sales, better-than-expected employment growth, a strong upswing in corporate investment and a positive external environment – where China is booming and the US economy firm – as reasons why eurozone growth could surprise on the upside. A sharp drop in the ZEW German business sentiment index is largely explained by a pending value-added-tax increase, and Garganas said, «I would not attach too much importance to that.» Against this backdrop, Garganas said the inflation outlook shows some signs of worsening. «I would say the recent jump in oil prices and the geopolitical situation have worsened. We have seen, of course, rapid money and credit growth, the highest for a number of years, so I would have thought these are the main risks that have increased recently.» Inflation expectations Inflation expectations are also slightly above the ECB’s definition of price stability, he said, although they have not deteriorated dramatically, based on data from the ECB’s survey of professional forecasters. The ECB defines price stability as inflation «below, but close to, 2 percent.» What is critical is that the ECB prevent inflation expectations from rising. «That is one of the reasons why we should be vigilant, to make sure we avoid one of the risks to the materialization of inflation,» he said. «If you have a significant deterioration of inflation expectations that persist for some time, it is somewhat difficult to correct them. It takes time and effort to do that, and that is why one should act in time, rather than wait.» The ECB has raised rates by 0.75 percentage points since early December, and financial markets expect a similar amount of tightening to 3.5 percent by the year end. Garganas also noted that the HICP consumer price inflation measure has held at around 2.5 percent in recent months, above the ECB’s price stability level, and that core inflation has ticked up to 1.5 percent in June from 1.4 percent. Pressed on whether the strong growth outlook plus these inflationary dangers warrant faster rate tightening by the ECB, and whether he would favor a 50 basis point rate rise, Garganas declined to comment on what action the Governing Council might take at its August 3 meeting. «We do not precommit ourselves either to the pace or the magnitude of monitoring accommodation,» he said several times. However, he said the ECB’s decision to meet in person on August 3, instead of holding its traditional teleconference during the summer holiday season, underlines its resolve. «A physical meeting is very much consistent with our posture in our last statement that we are strongly vigilant; that is, we are doing all that is possible to make sure that risks to price stability do not materialize,» he said.