Central bank urges restraint on pay rises to protect competitiveness

Concerned about inflation and the country’s declining competitiveness, the Bank of Greece yesterday urged restraint in pay and utility rate rises, while calling for tax incentives to bolster savings as a means of dampening a record current account deficit. Central bank Governor Nikos Garganas warned that the rise in inflation, due to prices of oil and raw materials, and its impact on the purchasing power of households, should not be met by nominal pay increases which would lead to an inflationary spiral. «Nominal wage increases are no solution, inflationary money is no solution,» he said at a presentation of the Bank of Greece’s 2007/08 monetary policy report. While recognizing the difficult circumstances faced by the low-paid, Garganas insisted that «in the last 10-15 years, workers’ living standards have risen dramatically, by about 35 percent, due to increasing productivity.» The Bank of Greece projects inflation to remain at around 4 percent in coming months and decline thereafter. The figure for 2008 is seen at 3.4 percent, the 2001-2007 average. The projection is based on the assumption of an average price of crude oil of $85.50-$88. Separately, the National Statistics Service (NSS) said yesterday Greek headline consumer inflation remained steady for a third month at an annual 3.9 percent in January, its highest level since September 2005. «Inflation was shaped mainly by the increase in heating oil, which rose significantly, and higher prices for gasoline. There were also price increases in supermarket goods, especially cereals and flour products,» the NSS said. Profiteering Garganas acknowledged that profiteering by a number of firms with dominant market positions was a contributory factor to inflationary pressures. He urged a strengthening of competition in the sectors most affected. Separately, Economy Minister Giorgos Alogoskoufis also acknowledged that certain sectors of the economy have especially high profit margins. «There are cases where, due to oligopolistic conditions, prices cannot be justified by cost increases,» he told reporters. But the central bank governor appeared even more concerned about the country’s gaping current account deficit, which expanded by -8.59 billion over 2006 to reach -32.26 billion or 14.1 percent of revised GDP (compared with 11.1 percent of GDP in 2006,) according to figures released on Tuesday. «The especially high current account deficit must be the focus of attention of economic policy, due to the serious repercussions it can have on the economy’s growth prospects. Economic policy must encourage private savings with the appropriate incentives, while the continuation of fiscal consolidation should contribute to general government savings turning positive in future,» said the central bank report. The Bank of Greece estimates that the country’s growth rate will slow down from 4 percent last year to 3.7 percent in 2008, based mainly on private consumption and investment. However, taking into account the current uncertainties and risk factors in the international economy, a steeper slowdown cannot be ruled out, the report said. Garganas says credit market crisis may still slow growth Credit market problems may have a larger impact on the eurozone than expected but growth is still likely to be near potential this year, said Garganas, who is a member of the European Central Bank Governing Council. He stressed the ECB was still concerned about inflation – as did his French colleague Christian Noyer in a magazine interview published yesterday – and said consumer prices looked set to rise much faster than the ECB’s target. «In the eurozone, GDP growth this year is seen as decelerating but remaining close to potential. Based on the Eurosystem’s projections, average annual inflation in 2008 will significantly exceed 2 percent,» he said. «The impact on lending conditions and on the economic climate from credit market developments may be larger than expected. For this reason, the ECB continues to all monitor developments with great attention,» said Garganas. The ECB left interest rates at 4 percent at its last meeting on February 7, and ECB President Jean-Claude Trichet said then that policymakers did not discuss changing rates. But economists expect eurozone growth to slow sharply to around 1.6 percent this year from 2.7 percent in 2007, and for the ECB to cut rates to 3.5 percent by the end of September. In December, the ECB’s staff forecast growth of around 2 percent and inflation of about 2.5 percent in 2008, though since then a number of policymakers have said that the growth outlook in particular has worsened. «The fundamentals for the eurozone economy are healthy but prospects for economic activity may be adversely affected as the impact of market risk reappraisal, which is ongoing, is surrounded by unusually high uncertainty,» Garganas said. The world economy would probably grow by just over 4 percent this year, Garganas said. Europe has not been affected by the problem of subprime mortgages to anything like the extent of the United States. But since August, European banks have been much warier of lending to each other, and the gloomier US outlook has hurt business and investor confidence. Noyer, in an interview with the weekly magazine Paris Match, said he did not expect big consumer credit problems in France. «Europe is not experiencing a housing crisis… in France, the level of household debt remains very low,» Noyer said. «I do not believe there will be a credit crisis for private individuals in France.» Regardless of the growth outlook, the ECB’s main job was controlling inflation, Noyer added. «Our priority is preserving purchasing power, therefore fighting inflation,» he said. «We will never choose to sacrifice purchasing power in the name of growth. To defend purchasing power is to support growth.» (Reuters)