Garganas: ECB will act firmly on inflation

FRANKFURT (Reuters) – The European Central Bank is prepared to act firmly if needed to head off inflation but is not set on any specific course of action, Governing Council member Nicholas Garganas said in comments published yesterday. In an interview with news agency Dow Jones, Garganas said risks to inflation were clearly on the upside, not least from rapid economic growth in the 13-nation region. «You must always bear in mind that when necessary we are prepared to act in a firm manner to ensure that we achieve our objective, to make sure that risks to price stability do not materialize,» Garganas said. «We don’t predetermine our actions. We will make our decisions on the basis of incoming data.» The Greek central bank chief’s comments are in line with the ECB’s statement on June 6, when the Central Bank raised rates to a near six-year high of 4.0 percent. Analysts expect a further increase to 4.25 percent in September. Fellow Governing Council member Erkki Liikanen also pushed home the message that eurozone rates were still supporting growth and that the ECB was determined to head off any spike upward in inflation. «Given the positive economic environment in the euro area, favorable financing conditions and vigorous money and credit growth, monetary policy is still on the accommodative side,» he said in remarks prepared for release with the Bank of Finland’s quarterly economic report in Helsinki. «The Governing Council of the ECB will monitor closely all developments to ensure that risks to price stability over the medium term do not materialize.» Liikanen said climate change and capacity bottlenecks could limit growth, and also pointed to uncertainty around oil prices, which the ECB sees as an upside risk to inflation. Dependent on data The ECB has raised interest rates eight times over the last 18 months and borrowing costs are now assumed to be close to the neutral level where they neither drag on nor boost the economy. Liikanen declined to comment on where a neutral rate level would be, and Dow Jones said Garganas also declined to discuss the hypothetical prospect of moving rates into restrictive territory. He said, however, that the ECB would take into account «any transmission effects» from previous rate rises, although the main hinge of policy was the flow of data. «It’s very important to appreciate that we have this flexible policy approach. We have to wait for incoming data, assess them, and make a decision,» Garganas said. Growth was expected to be somewhat above potential in 2007 and perhaps in 2008 as well, he said, adding to inflation risks. «We’ve now moved from a recovery to an upswing in the euro area economy,» he said.

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