Wednesday, March 12, 2008

ECB on Eurozone Inflation.

BERLIN, March 12 (Reuters) - European Central Bank policymakers are "particularly concerned" about inflation and do not see a serious slowdown in the euro zone economy, ECB Executive Board member Juergen Stark said on Wednesday.

Stark said the ECB's main priority was to deliver stable prices and that it did not cooperate with other central banks on monetary policy. "We don't have a double mandate. We have a mandate to guarantee price stability," he said.

"I and the Governing Council of the ECB are particularly concerned about the rate of inflation. This is a very unsatisfactory state of affairs," Stark said in a speech in Berlin on the economic and monetary outlook in the euro zone.

"Our highest priority remains maintaining price stability."

Euro zone inflation is running at a record high of 3.2 percent and the ECB, unlike its U.S. and British counterparts, has kept its interest rates unchanged since U.S. credit troubles started to spill across the Atlantic last summer.

Under its mandate, the ECB aims to keep inflation below but close to 2 percent.

Stark said the U.S. credit woes were rippling out from the United States but not hitting the euro zone too hard.

"So far there has only been a limited impact on the euro zone economy from the turbulence on financial markets," he said. "There is no credit squeeze." Last week, ECB staff raised their forecasts for euro zone inflation and cut the outlook for economic growth.

New staff projections put the Harmonised Index of Consumer Inflation for this year in a 2.6-3.2 percent range, raising the midpoint to 2.9 percent, from 2.5 percent in the last round of forecasts in December.

Growth in the 15-nation region was seen at 1.3-2.1 percent, for a midpoint of 1.7 percent in 2008.

"We are experiencing a slowdown in growth, but not a serious one," Stark said.

Most private-sector economists expect a worsening euro zone growth outlook to cause the ECB to cut rates to 3.75 percent from 4 percent currently before the end of June.

Stark urged trade unions and employers to show wage moderation in the latest pay negotiations and not to react to price rises by agreeing large raises.

"So the appeal to wage negotiators is not to generate second-round effects as this would lead to a wage-price spiral. In any case, the ECB would not tolerate such second-round effects," he said.

Berthold Huber, leader of German industrial union IG Metall, has dubbed 2008 "mega wage year" for Europe's largest economy.

Germany enjoyed its strongest growth in six years in 2006 and slowed only slightly last year, but it has seen virtually no real wage growth in the last two years. Stark took a swipe at politicians who question the ECB's independence.

"I certainly would like to warn against a continuation of any discussion among politicians that calls the independence of the ECB into question," he said.

"Some politicians are at different stages of the learning curve. There is always hope that they will make some progress."


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