Tags: ecb | inflation | expectations

ECB Member: Inflation Expectations Appear Steady

Sunday, 28 Aug 2011 02:41 PM

European Central Bank Governing Council member Ewald Nowotny said he sees no upward pressure on inflation expectations in the euro-area, indicating policy makers may have scope to keep their key interest rate on hold after two increases this year.

“What we see is that inflation expectations are stable,” Nowotny said in an interview Friday at a conference of central bankers in Jackson Hole, Wyoming. “For the time being, looking at oil prices and general demand, I do not see specific issues that could contribute to an increase in inflation expectations.”

The Frankfurt-based central bank raised its benchmark interest rate to 1.5 percent this year before keeping it unchanged this month. The region’s sovereign-debt crisis and signs of a global economic slowdown last week prompted economists from Citigroup Inc. to UBS AG to predict the ECB will leave its key rate on hold until 2013.

While Nowotny declined to comment on the outlook for monetary policy, he said it was “very premature” to make such forecasts. The “growth perspective is intact,” and the expansion this year will provide a “rather strong base” for 2012, he said.

“Even if there is a slowdown, it won’t mean recession,” he said.

Inflation slowed in July to 2.5 percent from 2.7 percent in June, breaching the ECB’s 2 percent limit for an eighth month. A gauge of inflation expectations used by economists at HSBC Holdings Plc and based on inflation-indexed bonds of Germany, France, Italy and Greece has declined to about 1.66 percent from about 2.4 percent in April.

Losing Momentum

Adding to signs the euro-region recovery is losing momentum, growth in loans to households and companies in the euro area slowed in July, data showed this week. Meantime, European services and manufacturing industries are expanding at the slowest pace in almost two years, and investor confidence in Germany fell this month to its lowest in 2 1/2 years.

Nowotny urged European governments to ratify agreements to increase the size of their rescue facility to 440 billion euros ($638 billion) and to allow it to buy bonds and aid banks, relieving pressure on the ECB to do so after it began purchasing Spanish and Italian government securities this month to contain the debt crisis.

“The main challenge is to turn these decisions into actions,” he said. “I am concerned by the delays we’ve seen in the political field.”

Lehman Comparison

The ECB official played down signs that lending between European banks is freezing again as it did in late 2008 after the collapse of Lehman Brothers Holdings Inc. “One should not over-estimate the situation,” he said. “We are away from a situation like that after Lehman. It is something to be observed, but not an immediate challenge.”

Nowotny defended the ECB’s earlier shift toward tighter monetary policy against criticism from economists including Nouriel Roubini, chairman and co-founder of Roubini Global Economics LLC in New York, and Paul Krugman of Princeton University in New Jersey. The rate increases “clearly emphasized the prime concern of the ECB is to maintain price stability,” he said.

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