ECONOMY

Trichet cautions on inflation danger

STRASBOURG – European Central Bank President Jean-Claude Trichet warned yesterday about upside inflation risks for next year, and pointed to higher interest rates to come. The ECB will monitor economic developments very closely and raise rates further if needed, he told the European Parliament, highlighting inflation dangers from potential wage increases and the delayed impact of past oil price rises. «If our assumptions and baseline scenario are confirmed, it will remain warranted to further withdraw monetary accommodation,» he told members of the EU Parliament, even as they advised the ECB to move carefully on future rate increases. Other ECB policy-makers have expressed similar concerns on inflation. ECB executive board member Lorenzo Bini Smaghi said in a speech released yesterday that monetary policy in the United States, the eurozone and Japan remained significantly expansionary, and warned generally against ending the rate hike cycle too soon. Trichet’s testimony was similar to his comments after the ECB’s last policy meeting earlier this month when he effectively confirmed market expectations that the bank was likely to raise rates in December to 3.50 percent from 3.25 percent. «The Governing Council will… continue to monitor very closely all developments so as to ensure price stability over the medium to longer term,» he told Parliament. «With regard to consumer prices, annual HICP inflation rates, not withstanding their decline in most recent months, will remain elevated at levels above 2 percent in 2006. As regards 2007, inflation risks remain on the upside,» he said. Eurozone bonds briefly lost some ground after Trichet’s comments on inflation, while the euro got an extra boost, reaching a two-month high against the yen. «This is looking beyond the widely predicted rate rise to 3.50 percent between now and the end of the year, which is highly likely,» said Andre da Silva, strategist at HSBC in London. «To me this is more of a preparation of conditions of further tightening into next year.» After Trichet’s testimony, the Parliament approved by a large margin a committee report which urges the ECB to be cautious about further rate rises and take care not to damage growth. It also asked the ECB to be more transparent and publish the minutes of its policy discussions like the US Federal Reserve does. Trichet rejected the call for more openness, and said 2006 economic data confirmed that growth was getting stronger. «All the main indicators of economic activity in the euro area that have become available in the course of 2006 confirm the Governing Council’s assessment that economic growth has gained momentum and in addition become more broad-based, mainly supported by domestic demand,» Trichet said. The eurozone economy is showing its strongest growth since 2000, and ECB staff estimated in August that inflation was likely to be around 2.4 percent this year and next, above the ECB’s target of a rate just below 2 percent. However, financial markets are uncertain how the ECB will tackle inflation because it is unclear how much a cooling US economy and a rise in German value-added tax will slow the eurozone economy next year. A slim majority of analysts expect a further quarter percentage point rise in interest rates to 3.75 percent in the first half of 2007, according to a Reuters poll which was published on Wednesday. Lawmaker says 500-euro notes useful only to criminals STRASBOURG (Reuters) – The head of the European Central Bank rejected an accusation yesterday that the continued production of 500-euro ($633) notes was helping criminals to launder money. In a European Parliament debate on the ECB’s annual report for 2005, British independent Ashley Mote said the 500-euro bills, printed in ever larger numbers by the Frankfurt-based bank, were of use only to people involved in crime. «The only possible conclusion we can reap is that the ECB is actively involved in aiding and abetting money laundering,» Mote said, adding that an investigative report by Britain’s Sunday Times newspaper had found the notes were systematically used by money launderers in Spain, Italy and Greece. Speaking in English, ECB President Jean-Claude Trichet responded by telling lawmakers, «Of course I don’t agree at all with the remark which was made on the fact that we would actively help fraud.» Several EU member states – notably Germany – had a tradition of high-denomination bank notes and this had been respected when euro notes and coins were introduced in 2002. «In some countries the note is used, in others it is not. But we decided not to eliminate that possibility for those countries and economies that were used to it,» Trichet said. An ECB report in July said just 1 percent of the 300,000 counterfeit notes withdrawn from circulation in the first half of 2006 were 500-euro notes. The 20-euro note was the most forged, overtaking the 50-euro bill, which had previously been the most popular. Together they make up 80 percent of note forgeries found. There are 401 million 500-euro banknotes in circulation, worth 200.5 billion euros, according to ECB data. The 50-euro banknote is the most widely circulated at 3.7 billion notes worth 186.8 billion euros.