ECB warns again over rate hike

EUROPEAN Central Bank executive board member Gertrude Tumpel-Gugerell has said “strong vigilance” is necessary to keep a lid on inflation — indicating policy makers may raise interest rates next month.

“Should there be any signs of inflationary risks over the medium term, the ECB is ready and determined to take appropriate action in good time,” Tumpel-Gugerell said in a speech in Salzburg, Austria.

“The risks to medium-term price developments are tilted to the upside,” she said. “Against this background, strong vigilance is, of course, necessary and we are monitoring the situation closely.”

Tumpel-Gugerell is the first ECB board member to repeat the phrase “strong vigilance,” which indicates a rate increase is imminent, since the earthquake and tsunami in Japan prompted investors to pare bets on higher borrowing costs. ECB president Jean-Claude Trichet said on March 3 that the bank may raise its benchmark rate from a record low of 1% in April. He said he has “nothing to add” to that statement.

The euro rose to $1.42, the highest since November. German 10-year government bonds declined for a third day, pushing the yield to the highest in a week.

Inflation in the 17-member euro-area accelerated to 2.4% in February and has been in breach of the ECB’s 2% limit since December.

“It is crucial at this stage to avoid that the recent rise in inflation translates into broad-based second-round effects, for instance via price-setting or higher wages,” Trichet told European lawmakers in Brussels.

“Such effects would give rise to broad-based inflationary pressures over the medium term.”

Tumpel-Gugerell said the surge in oil prices above $100 a barrel is “cause for concern.”

The ECB’s latest forecasts, which show inflation averaging 1.7% next year, “do not take into account the recent oil-price hikes and are based on the assumption that wage pressures will remain subdued,” she said.

At the same time, “all available forecasts indicate that the gradual recovery of economic activity in the euro area is likely to continue,” Tumpel-Gugerell said. Tumpel-Gugerell also said the situation in money markets “has improved further” and banks are requesting “significantly less liquidity than before.”