Surge in oil prices means inflation risk

EUROPEAN Central Bank council members including Axel Weber and Yves Mersch said the surge in oil prices risks pushing up inflation as economic growth accelerates, indicating the bank is poised to raise interest rates.

Inflation risks “have to be countered in an appropriate way”, Weber told reporters in Berlin yesterday, saying that the 2.5% benchmark interest rate is still “very low”.

Mersch in an interview in Luxembourg yesterday didn’t rule out that the ECB may revise its 2.2% inflation forecast for 2006.

The comments reflect the ECB’s concern a 19% surge in oil prices this year may feed into wage demands and lead to more entrenched inflation as the economy of the dozen euro nations expands. German business confidence climbed to a 15-year high in April and French executives were also more optimistic.

Crude oil prices traded at $72.60 per barrel, down from a record of $75.35 in New York last week.

Stronger growth is giving companies more room to pass on higher energy costs and labour unions to push for wage increases.

That’s adding to pressure on the ECB to raise rates again for the third time in six months. German inflation accelerated in April on rising energy costs, figures from five states showed.

In the euro region, money-supply growth, which the ECB uses to gauge future inflation, accelerated in February to the fastest in five months. Consumer prices rose 2.2% in March from a year ago, holding above the bank’s 2% ceiling for a 14th straight month.

ECB council member Klaus Liebscher said at a briefing in Vienna that the ECB is “closely monitoring” oil prices, which are among “upside risks”.

The bank is “worried” that rising oil prices may feed into wage demands as labour unions try and make up for a loss of purchasing power.

Adding to expectations of higher rates, Mersch said that money-supply growth is giving “some indication” of upside risks to price stability over the medium to long-term.