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Nowotny Says Investor Expectations for ECB ‘Well Founded’

Ewald Nowotny of the ECB
European Central Bank Governing Council member Ewald Nowotny. Photographer: Dieter Nagl/Bloomberg

European Central Bank Governing Council member Ewald Nowotny endorsed investors’ expectations of a further tightening of monetary policy this year after inflation climbed to its highest since 2008.

“The expectation is well founded,” Nowotny said in an interview in Washington yesterday when asked about forecasts that the ECB will raise its benchmark interest rate another 0.50 percentage point this year. “I don’t want to comment on specific numbers, but the tendency is well understood. The exact timing is a matter to be decided according to the economic situation.”

Nowotny’s comments indicate the Frankfurt-based ECB will add to this month’s quarter-point increase even after President Jean-Claude Trichet said it wasn’t necessarily the start of a series. Higher euro-area rates may help extend the euro’s 8 percent gain against the dollar this year as the U.S. Federal Reserve signals no imminent plan to raise its key rate from close to zero.

“It’s obvious that we have to take price movements very seriously,” Nowotny said. “We will of course have a revision of our forecast” on inflation, he said.

Rate Expectations

The ECB raised its main refinancing rate to 1.25 percent on April 7 to quell accelerating cost pressures, ending almost two years at a record low of 1 percent. Traders expect the ECB to raise the rate to 1.75 percent by the end of the year, Eonia forward contracts show. Economists are projecting the same result, based on the median forecast of 24 analysts in a Bloomberg News survey this month.

“Nowotny is certainly right to underline continuing upward pressures on inflation,” said Klaus Baader, co-chief euro-area economist at Societe Generale in London. “You can read this possibly that risks for interest rates might be even on the upside,” said Baader, who expects the benchmark rate to reach 2 percent by year-end.

Nowotny, 66, is one of 23 ECB council members and has headed Austria’s central bank since September 2008. He was chief executive officer of Bawag PSK Bank from 2006 to 2007 and a member of the Austrian parliament from 1979 to 1999.

Forecast Revision

The ECB on March 3 lifted its forecast for inflation to about 2.3 percent this year from the 1.8 percent predicted in December. European inflation quickened to 2.7 percent in March, the fastest since October 2008, and has breached the ECB’s 2 percent limit since December after crude oil prices gained 35 percent in the past six months.

“It’s quite obvious that both our interest-rate regime and our liquidity regime have been in crisis mode for a quite long period of time,” Nowotny said. For the euro region as a whole, “we’re not any longer in a crisis situation, fortunately” and “this development will be reflected in the ECB’s policy,” he said.

Nowotny said the economic outlook for the euro region remains “rather mixed” with “very strong perspectives” for Germany, Austria and Nordic countries and weak growth prospects in peripheral member states. While the region as a whole has overcome the crisis, “very substantial differences within the region” are “an element of potential uncertainty,” he added.

The ECB expects gross domestic product growth to average about 1.7 percent this year and 1.8 percent in 2012. “For the time being I would stick to the growth perspective as we have published it in our latest ECB forecast,” Nowotny said.

Debt Woes

Debt woes in Greece, Portugal and Ireland won’t trigger contagion risks for other currency-bloc member states, Nowotny said. Last week, yields on Greek and Portuguese 10-year bonds surged to euro-era records.

“There’s a clear distinction in the markets between the countries which are under certain programs like Greece, Portugal and Ireland, whereas other countries are in a very different situation,” Nowotny said. “I don’t see the danger of a contagion.”

Investors are concerned a 110 billion-euro ($159 billion) bailout for Greece may fail to prevent the first default by a euro country. German Deputy Foreign Minister Werner Hoyer said on April 15 a Greek restructuring “would not be a disaster.”

Nowotny said he sees “no need” for a restructuring of Greek debt. Such a step “would be very harmful and not efficient” as it could have “negative side-effects on the banking system both in the country concerned and in other countries,” he said.

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