Papademos: Inflation still a risk in eurozone

Inflationary dangers persist in a eurozone economy enjoying robust growth that is likely to continue and unemployment to fall further, European Central Bank Vice President Lucas Papademos said on Wednesday. The top ECB official, speaking one week before the Governing Council discusses interest rates, said he had nothing to say to alter market expectations for a quarter percentage point ECB rate increase in June to 4 percent. His warnings on inflationary risks against a backdrop of solid economic growth also appeared to confirm that that rate hike is likely. The purchasing managers’ index (PMI) on Wednesday was firm at 55.4, while unemployment fell to a new record low of 7.2 percent. Warnings «The Governing Council’s recent assessment of risks to price stability continues to be valid,» Papademos told reporters after addressing the Academy of Athens. At its last meeting, the ECB had warned that price risks still lie to the upside and that monetary policy remains accommodative even after 175 basis points of rate increases to 3.75 percent since December 2005. «The Governing Council identified several risks to price stability, including a further increase in oil prices, wage developments that could be stronger than anticipated and continued rapid growth in broad money (M3),» Papademos said. Rising money supply Money supply growth surprised in March by accelerating to a new 24-year high, growing at a 10.9 percent annual rate. Papademos noted that this was of concern to the Central Bank. «Monetary developments in recent months underscore a continued trend of steady increases in broad money and liquidity. This continued expansion points to inflation risks in the medium to longer term,» he said. He made these comments the same day a senior Bank of France official, who advises fellow ECB Governing Council member Christian Noyer, fueled a brewing debate on what importance should be attached to M3 growth in ECB decisions. Michelle Saint Marc, a senior Bank of France official, told Reuters that the ECB could risk jeopardizing its credibility if it continued to rely on M3 without explaining better why the data has shown very little correlation to actual inflation. Papademos five months ago had said that eventually monetary analysis could be folded into economic analysis, a comment that had stirred strong concern among supporters of money supply as a predictor of inflationary trends. In his speech, Papademos said that healthy economic growth is expected to continue, fueled not only by strong global growth but also by a revving up of internal growth engines. Strong growth «The European economy is currently experiencing robust economic growth, which is expected to continue, benefiting from the ongoing strength of global economic activity despite the slowdown of the US economy,» Papademos said. Domestic demand in Europe is projected to expand at a solid pace and to be a primary driver, he said. While there are uncertainties and risks ahead, Papademos said market reforms are taking hold and helping to boost the growth outlook for the region. «There are encouraging signs that the supply side of the European economy is responding positively to the reforms in markets and institutions implemented over the past few years. «Productivity growth is picking up, employment is rising and the unemployment rate is projected to further decline. If future developments and further analysis confirm the indications of supply-side improvements, we can look forward to a gradual increase in the European economy’s potential for higher sustainable growth.» (Reuters)