Garganas says inflation is ‘major concern,’ while ECB is on the alert

European Central Bank council member Nicholas Garganas said the bank won’t be driven by investor expectations of an interest rate cut as inflation remains «a major concern.» «Our monetary policy is not driven by what the markets expect,» Garganas, who also heads the Greek central bank, said in an interview late on Thursday in his office in Athens. «I’m very concerned about the high inflation rate. Inflation risks remain on the upside.» Investors are betting the ECB will lower its benchmark rate this year as the fallout from the US housing market slump cools economic growth in Europe. ECB policymakers have refrained from following their US counterparts in paring interest rates after inflation overshot the bank’s limit for five months, to reach a 14-year high in January. Consumer prices in the 15 countries sharing the euro rose 3.2 percent in January from a year earlier. Inflation, which the ECB aims to keep just below 2 percent, averaged 2.1 percent in 2007. The ECB will act to prevent so-called second-round effects from emerging, such as inflation-driven demands for higher pay, Ireland’s central bank said separately today. «If there’s a risk that we’ll not achieve our objective in the medium term, we’ll act pre-emptively and decisively,» Garganas said. His remarks echo those of ECB council member Axel Weber, who last week described bets on rate cuts as «wishful thinking.» The implied rate on the Euribor interest rate futures contract maturing in December rose three basis points to 3.64 percent after the interview was published. That’s still down from 4.36 percent a month ago, indicating traders are pricing in two rate cuts. The ECB’s benchmark refinancing rate is 4 percent. Differing remarks Council member Yves Mersch on January 16 said risks to economic growth are increasing, suggesting the ECB is toning down its inflation-fighting rhetoric. His comments led to the biggest drop in the euro in a month. Last week, Mersch’s fellow council member Christian Noyer said rising consumer prices and slowing global economic growth are complicating interest rate policy. «We have to wait and see how the situation develops,» Garganas said. «Of course, the situation in financial markets is one of the factors on which we base our assessment.» Losses from securities linked to subprime mortgages, which are aimed at people with poor credit histories, may exceed $265 billion as regional US banks, credit unions and overseas financial institutions write down the value of their holdings, Standard & Poor’s said on Thursday. The International Monetary Fund cut its euro-region growth estimate by half a point to 1.6 percent this week, saying that the turmoil in financial markets has «reached a new phase – a phase where credit concerns now extend beyond the subprime sector.» Confidence among European executives and consumers fell in January more than economists forecast as inflation accelerated and US growth slowed to 0.2 percent in the fourth quarter. The world’s biggest economy hasn’t expanded less since 2002. The US Federal Reserve this week lowered its main rate by half a point to 3 percent, the second cut in nine days, and indicated its willingness to do so again to prevent a US recession. Garganas indicated the ECB sees no need to react to the widening spread between interest rates in the euro region and the USA. «We don’t discuss decisions by other central banks.» The ECB predicted in December that euro-region growth would slow to about 2 percent in 2008 from 2.6 percent last year. «The risks surrounding economic growth are on the downside,» Garganas said. Still, «our baseline scenario has not changed. The impact of the slowdown in the USA is to some extent offset by continued strength in emerging market economies.» The ECB remains focused on fighting inflation, Garganas said. «We have our own mandate to fulfill, assess the euro-area situation and decide on the basis of our own assessment.» (Bloomberg)