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ECB says prepared to 'act pre-emptively' to counter inflation pressures
FRANKFURT (Thomson Financial) - The European Central Bank reiterated that it is ready to raise interest rates if necessary to prevent a build-up of inflationary pressures in the euro zone. The ECB is concerned that companies and wage negotiators might increase wages and prices to compensate for recent rises in food and energy prices, which pushed headline inflation up to 3.1 pct in November and December. Such 'second round' effects would lead to a more lasting rise in headline inflation, it fears. 'The governing council remains prepared to act pre-emptively so that second round effects and upside risks to price stability over the medium term do not materialise,' the ECB said in its January monthly bulletin. 'It is imperative that all parties concerned meet their responsibilities and that second round effects on wage and price-setting stemming from current inflation rates be avoided. In the view of the governing council, this is absolutely essential in order to preserve price stability in the medium run,' it said. The ECB said it is monitoring wage negotiations with particular attention. It said risks to the inflation outlook are clearly on the upside. Inflation is expected to remain significantly above 2 pct in the coming months and to moderate only gradually in the course of 2008, it said. But this expectation of a moderation in inflation assumes that recent rises in commodity prices will be partly reversed and that there are no second round inflation effects on wage and price-setting behaviour, it said. The ECB said it still expects the euro zone economy to continue growing around its 2.0 pct potential rate, describing the area's economic fundamentals as sound. However, it said uncertainty about the economic impact of recent tensions in credit markets remains high and risks to the growth outlook lie on the downside. The bulletin editorial closely matches ECB president Jean-Claude Trichet's introductory statement to last week's ECB news conference. [email][email protected][/email] sw/jlw COPYRIGHT Copyright Thomson Financial News Limited 2007. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.