BRUSSELS/LISBON (Reuters) - European Central Bank policymakers held their tough line on inflation risks on Tuesday, despite fresh turmoil on financial markets and an emergency cut in U.S. interest rates.
The ECB declined to comment on the Federal Reserve’s 75 basis point interest rate cut, which took U.S rates below the euro zone’s for the first time since late 2004 and surprised some people at the ECB as well as market participants.
But earlier comments by ECB policymakers suggested there was no consensus for a similar move in the euro zone, although opinion remains divided on the economic outlook.
Executive Board members Juergen Stark and Jose Manuel Gonzalez-Paramo said the euro zone’s economic fundamentals were sound, and pointed to continued upward pressure on inflation, a stance echoed by German Bundesbank President Axel Weber.
However, Portuguese central bank governor Vitor Constancio said European growth could be slower than earlier expected, comments which were in line with growing market expectations that the ECB may have to change tack before the end of the year.
The ECB has kept interest rates at 4.0 percent since mid-2007 but economists believe the Governing Council is increasingly squeezed by the prospect of slower growth on the one hand and price risks on the other.
“Currently, we are dealing with a relatively high inflation rate of more than 3 percent,” Stark told German radio station Deutschlandfunk. “That will continue for the next few months. We will monitor closely how inflation develops and how market participants react to these new conditions, and we will act accordingly.”
Later, giving a speech in Brussels, Stark passed up the opportunity to comment on the rate cuts by the Fed and the Bank of Canada, saying he had only just received the news and did not know all the details. “I have to talk to my colleagues,” he told reporters.
INFLATION VS GROWTH
Gonzalez-Paramo said the ECB would, as always, do what was needed to protect price stability, but that it was not possible to say how market turmoil would influence inflation. For its part, growth was still holding up.
“The main scenario is growth consistent with potential, which is around two percent,” he told Portuguese broadcaster SIC before the Fed announcement. “The fundamentals of the European economy remain solid.”
Weber said the ECB would not allow current inflation at 6-1/2 year highs to spill over into wage demands and consumer prices. “We have zero tolerance for a wage-price spiral. If financial and wage developments threaten to leave the stability corridor, we will act decisively,” he said in an interview with German magazine Focus Money.
But Constancio struck a more cautious note on inflation, noting that this was also influenced by real economy developments, and said Europe would not be immune to the rising risk of a U.S. recession.
“Certainly the probability has increased and that’s a consequence of a revision of expectations by investors worldwide,” he told Reuters during a conference in Lisbon.
Stark and Weber played down the prospect of a U.S. recession, saying growth should continue albeit at a weaker pace.
They also shrugged off renewed turbulence on financial markets, after European shares sank 6 percent on Monday, their biggest one-day slide since the September 11, 2001 attacks amid concern about the scale of the U.S. economic slowdown and fears of more financial sector losses.
“Financial markets tend to overreact,” Gonzalez-Paramo said. “There is overshooting and undershooting. I would not make a full story out of what happened yesterday.”
Stark repeated earlier calls for more transparency and said the process of market correction would probably continue for a while.
“The markets are very nervous. They get new information every day and are very sensitive to it, perhaps excessively so,” Stark said. “This high volatility that we see is certainly not helpful but on the other hand, one should not exaggerate events.”
Additional reporting by Sergio Goncalves in Lisbon, Krista Hughes and David Milliken in Frankfurt and Klaus Lauer in Berlin; writing by Krista Hughes; editing by David Stamp
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