ECONOMY

Garganas forecasts inflation to worsen

FRANKFURT (Reuters) – Inflation risks are rising in the eurozone and another interest rate increase by the European Central Bank is likely, Governing Council member Nicholas Garganas was quoted yesterday as saying. «I would expect that a further withdrawal of monetary accommodation is warranted,» Garganas told the news agency Bloomberg. «Risks to inflation have increased» and «it is crucial that we act in a firm and timely manner, preemptively, to ensure price stability,» he was quoted as saying in an interview conducted on Monday. He cited higher oil prices, rapid improvements in labor markets and high capacity utilization as inflationary drivers. Garganas also showed concern about rapid exchange rate movements. The euro rose to a new record last week above $1.38 against the US dollar and currently is trading around $1.3785. «My position is that of the Governing Council, that is: Excess volatility and disorderly movements in exchange rates are undesirable for economic growth.» Asked if the current movements represent excess volatility, the Bank of Greece governor said, «Yes, they do.» The ECB has warned against excess volatility in the exchange rates in the past when the euro has accelerated rapidly and it wants to slow its advance. Already euro strength is starting to dampen confidence. The ZEW investor sentiment indicator fell sharply to 10.4 in July from 20.3 the prior month, partly on euro strength and higher eurozone interest rates. The ECB has raised its benchmark rate by 200 basis points to 4 percent over the past 19 months, and it is widely expected to deliver another hike in September, or possibly October. Garganas in the Bloomberg interview said that the Governing Council needs more information before making that decision. «We have to wait for incoming data» to determine «whether to take action in September or October,» he was quoted as saying. In September, the ECB will have updated staff economic projections for growth and inflation. Garganas said he «would not be surprised» if 2007 growth was revised upward from the 2.6 percent midpoint in a range released in June. «The eurozone economy is growing at a rate clearly above» its non-inflationary pace, he told Bloomberg. «We will continue to monitor developments closely, or very closely if you prefer,» he said.