The Dutch central bank, led by Nout Wellink, said the European Central Bank’s credibility in Germany may suffer if it doesn’t raise rates enough to slow accelerating inflation in Europe’s largest economy.
“The strong economic pickup in Germany makes clear that a recovering economy comes with higher inflation and therefore needs a higher benchmark interest rate,” the Amsterdam-based central bank wrote in its annual report today. “The ECB can’t (fully) fulfill that need if inflation elsewhere in the euro zone is substantially below 2 percent and in some countries even negative.”
“The longer such a situation continues, the harder it will be for the ECB to maintain its credibility among the public in the largest member state, with its deep-rooted aversion to inflation,” Wellink said in the report.
Rising energy and food costs are fanning inflation in Germany, increasing pressure on the ECB to raise rates. German inflation remained at 2.2 percent in March, the highest since October 2008, and inflation across the region unexpectedly accelerated to 2.6 percent.
“The factual inflation is high for European standards,” Wellink told reporters in Amsterdam today. “In other parts of the world inflation is even higher, namely in Asian countries, which affects the price of goods imported to Europe.”
Officials have signaled the impact of the Japanese earthquake and tsunami won’t deter them from lifting borrowing costs for the first time in almost three years next month.
“On a more abstract level, the interest rate is extremely low,” said Wellink, whose term ends on July 1. “Also on an abstract level, which has nothing to do with the current circumstances, an increase from a level of 1 percent doesn’t change the world, it only indicates monetary authorities are alert.”
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