VIENNA (Reuters) - The European Central Bank’s “strong vigilance” message on tackling inflation still applies despite added economic uncertainty after Japan’s huge earthquake and unrest in North Africa, ECB policymaker Ewald Nowotny said.
ECB President Jean-Claude Trichet used the phrase “strong vigilance” earlier this month -- a term the bank used repeatedly during its 2005-2007 rate hike cycle, typically one month before it raised rates, although there were exceptions to that rule.
“Strong vigilance is the message that has been given and that is still relevant,” Nowotny, an ECB Governing Council member, told Reuters in an interview on Monday, noting the ECB still has until its April policy meeting to gauge developments.
Asked whether it was plausible for ECB rates to stand at 1.75 percent by the year’s end, he replied: “Well... everything is plausible, but we never can commit ourselves or even predict these developments, because as we have just seen, these days there is a lot of uncertainty and we have to observe developments in a very cautious way.”
Asked about a fall in the oil price, which hit two-week lows on Monday on concerns about the economic impact of Japan’s earthquake and tsunami, Nowotny said: “I don’t think you should judge after one day.”
“The more critical situation might be related to developments in North Africa and the Near East,” where a wave of uprisings has toppled entrenched strongmen and challenged the rule of Muammar Gaddafi, leader of oil producer Libya.
“These are developments that, due to Japan, are not that much in focus now as they have been last week. But we are all aware that there are developments still going on and with an outcome that is not fully clear for the time being,” he said.
“This is the main field where one has to be very cautious,” Nowotny added, speaking in his paneled office in central Vienna.
Turning to last Friday’s summit of euro zone leaders, Nowotny said its outcome was in total positive and that the possibility of a sovereign debt restructuring or even a debt default by a euro zone state had receded as a result.
“I think it has receded, because it has also been agreed that the (rescue) funds may buy bonds from governments directly, which I think makes a lot of sense. And it means that the pressure on these governments may decrease,” he said.
Euro zone leaders agreed on Friday that the effective lending capacity of the bloc’s rescue fund, the European Financial Stability Facility (EFSF), should be raised from the current 250 billion euros to the nominal value of 440 billion euros.
They also agreed that Europe’s rescue fund will be able to buy new bonds directly from member states.
Asked if the ECB’s program to buy bonds on the market -- begun last May as part of efforts to tackle Europe’s debt crisis and get markets back into order -- should be ended, Nowotny said: “This bond-buying program ... was never intended to be a permanent feature of the instruments of the European Central Bank.”
“The hope is that the new features that have been decided last Friday will also bring more market efficiency and transparency to the markets,” he added.
He said that if there was no need for the ECB’s bond-buying program, then it could be withdrawn, but that it was too early to take a final decision on the program.
Portugal has announced “a number of very strong measures” Nowotny said, adding: “I do hope that these are measures that help to convince markets that there is a clear path toward stability and sustainability.”
Asked if Portugal would need an EU bailout, he added: “With the set of information (available) under the present circumstances I do not consider this necessary, but we are all aware that there is of course a high degree of uncertainty.”
Spain’s economic fundamentals were different to Portugal‘s, he added.
“The situation of Spain is very different from the situation in Portugal, also as it is reflected in the markets, so I would not see any direct connection between these two countries.”
Reporting by Paul Carrel, Michael Shields and Reuters Insider; Editing by Hugh Lawson/Patrick Graham