Garganas says ECB hikes almost certain
Eurozone monetary conditions are very loose and inflationary pressures significant, leaving little doubt that further interest rate increases may be needed in 2007, European Central Bank policymaker Nicholas Garganas said. ECB rates will have to head higher if the economy continues to grow around potential and inflation remains above 2 percent as he expects, Garganas, a member of the ECB’s Governing Council, told Reuters in an interview. «If the scenario is confirmed, there is little doubt it will be warranted to have further withdrawal of monetary accommodation because monetary conditions are still very accommodative, despite the interest rate increases of the past 11 months,» he said in the interview, conducted on Monday. The ECB had already raised its key rate by 125 basis points since last December and signaled a further 25 bps increase to 3.5 percent when the Council next decides rates on December 7. Asked about the rate outlook beyond that, Garganas said more will be known after the December meeting and repeated the ECB’s mantra that it has no set course and will do what is needed to assure price stability. But he left few doubts on his own view. «No matter what criteria one uses to characterize monetary conditions, the conclusion is inescapable that there is more than ample liquidity. Despite the interest rate increases to date, real rates remain through the whole maturity spectrum near historically low levels,» he said. M3 money supply growing at 8.5 percent is almost double the nominal rate at which GDP is expanding, and credit growth is also strong while the economy is «improving, even buoyant,» said Garganas, who is also the Greek central bank chief. «All in all, there is little doubt conditions remain very accommodative, very accommodative,» he said. Inflation pressure Moreover inflationary risks remain on the upside, not only due to these stimulative monetary conditions, he said. «Based on the information that we have here, we expect inflation will remain elevated at levels above 2 percent both this year as a whole well as in 2007,» he said. «If one looks at what is happening to producer prices, and non-energy related prices, the picture is one of elevated prices for goods. I think this is a clear indication of significant inflationary pressures remaining in the system.» Headline consumer inflation retreated in September and October to meet the ECB’s goal of price gains just below 2 percent. But producer prices, excluding energy, rose 3.6 percent year-on-year in September against 1.3 percent in the third quarter of 2005. «That is why we are strongly vigilant,» he said. Garganas would not speculate on 2008 inflation, which will be in staff projections released next month, beyond saying, «I do hope it will be below 2 percent, but it is too early to tell.» Growth resilient The Greek central bank governor has long predicted strong eurozone growth, a forecast vindicated this year with GDP growth around 2.6 percent. He also is upbeat for 2007. He doubts the US economy, which saw surprisingly weak third-quarter GDP growth of 1.6 percent as the housing market tumbled, will drag down Europe – putting him at odds with many market economists who see the US as a headwind for Europe. «The housing market is beginning to bottom out. It is likely, in my view, that there will be a soft landing in the US.» The US slowdown is likely to be offset by strong growth elsewhere. Indicators point to Japan’s recovery remaining on track, China is decelerating toward a more sustainable rate from a very rapid pace and other emerging markets are robust. »So I would not really, at this stage, tend to worry about the US slowdown so much and its impact on the euro area economy, mainly because the eurozone is becoming more balanced with domestic demand now playing a key role.» Internal conditions in the eurozone have also strengthened. Cheap financing is keeping investment high and labor markets are improving, leading to gains in disposable income that support consumption, he said. «For 2007, the conditions are in place for growth around potential, although there may be some quarterly volatility around the beginning of the year, related to the VAT tax (rise) in Germany,» Garganas said. The European Commission’s latest forecasts for both inflation and GDP growth at 2.1 percent respectively in 2007 were reasonable. «They are consistent with the projections that I have given before and with my expectations.» Asked if markets correctly understand that monetary conditions are very accommodative given this economic outlook, he said, «I think they do today, and have done in the past.» But he cautioned on analysts’ and markets’ economic forecasts. «They have been underestimating growth prospects and they have been taking a rather too optimistic view on inflation,» he said.
