Weber Indicates ECB Might Increase Rates as Many as Three Times This Year
European Central Bank Council Member Axel Weber
Hannelore Foerster/Bloomberg
European Central Bank council member Axel Weber.
European Central Bank council member Axel Weber. Photographer: Hannelore Foerster/Bloomberg
March 8 (Bloomberg) -- European Central Bank Governing Council member Axel Weber talks with Bloomberg's Christian Vits in Frankfurt about the euro-zone economy, inflation and interest rates. (Source: Bloomberg)
European Central Bank Governing Council member Axel Weber said he doesn’t want to correct market expectations for as many as three quarter-point increases in the bank’s benchmark interest rate this year.
“I wouldn’t do anything here to try to correct market expectations at this point,” Weber told Bloomberg News in Frankfurt today when asked about investor bets that the ECB will raise its key rate to 1.75 percent by year-end. It was the intention of the ECB to bring forward market expectations and “I see no reason at this stage to signal any dissent with how markets priced future policies,” he said.
ECB President Jean-Claude Trichet took investors by surprise last week when he announced policy makers may raise the benchmark rate from a record low of 1 percent in April to combat mounting inflation pressures. While Trichet said the step would not necessarily be the start of a series of increases, Weber said the bank is embarking on a “normalization” of rates from crisis levels.
Inflation may be “more sustained and more fundamental” than the ECB’s latest projections suggest, Weber said.
“There are a number of fundamentals in emerging markets, a number of effects which worsen the medium to long-term inflation outlook,” he said. “This has to be countered in a timely way. I do see considerable future price pressures.”
Inflation Forecasts
The ECB last week predicted euro-area inflation will average about 2.3 percent this year and 1.7 percent in 2012. It aims to keep inflation just below 2 percent.
Crude oil prices rose to a 29-month high of close to $107 a barrel yesterday as escalating violence in Libya renewed concern that supply disruptions may spread through the Middle East and North Africa.
“The forward market seems to price in a reduction in oil prices toward around about $100,” Weber said. “I don’t fully subscribe to this relatively optimistic view. There’s a genuine underlying price pressure for energy and food.”
Policy makers are concerned about so-called second-round effects, when companies increase prices and boost wages to compensate for higher costs, entrenching faster inflation. While Germany’s economy, Europe’s largest, is booming, its euro-area peers such as Greece, Ireland and Portugal are still grappling with a debt crisis.
‘Too Soon’
Nouriel Roubini, the economist who predicted the global financial crisis, said in Dubai today that the ECB risks undermining the recovery in some euro-area nations by increasing borrowing costs “too soon.”
“My view of it is that the ECB is worrying too much about inflation,” Roubini told reporters. “I don’t see any meaningful risk of a second-round effect.”
Weber, who will step down from the helm of the Bundesbank at the end of April, said the ECB “has done the right thing” in sending “a clear signal that we’re not going to tolerate inflation above our target.”
He said the ECB should also considering withdrawing its emergency liquidity measures for banks “in the next few months.”
The ECB last week extended the measures, which include lending banks as much money as they need at its benchmark rate, through the second quarter.
“With the health of financial markets improving, we have to examine the full allotment mode,” Weber said.
To contact the reporters on this story: Christian Vits in Frankfurt at cvits@bloomberg.net; Jeff Black in Frankfurt jblack25@bloomberg.net
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