ECB's Weber says tightening cycle not over, price pressures remain

ECB's Weber says tightening cycle not over, price pressures remain

	Published : Fri, 20 Apr 2007 10:06 By : Agencies Print this Story

FRANKFURT (Thomson Financial) - The European Central Bank cannot yet specify an end-point for its current cycle of rate increases, given the prevailing economic climate and medium-term risks to price stability in the euro zone, said Governing Council member Axel Weber.

'I believe that in the current economic climate, we cannot give the all-clear sign in terms of monetary policy,' Weber said in an interview with Handelsblatt newspaper.

'We have to closely monitor the medium-term risks to prices, and act when warranted.'

Analysts said ECB President Jean-Claude Trichet has signaled last week after the bank left its key rates unchanged that the ECB would very likely increase rates in June, which would then bring the key refinancing rate from its current 3.75 pct to 4.00 pct.

Some analysts said there is still further room for a few more rate hikes after June while some believe that at 4.00 pct, the ECB would take a pause from its tightening cycle, which began in December 2005.

Weber, who is also Bundesbank president, said 'the economic climate and the medium-term prospects for developments in the economy are presently very positive,' adding this is true for both Germany and the euro zone as a whole.

He said he believes the 'favourable economic developments' in Germany will continue in the coming years.

He also believes there is a higher probability that inflationary pressures in the euro zone could increase rather than decrease.

The upside risks to inflation in the euro area are oil prices and the stronger-than-expected increases in wages, while monetary and credit data are also strong and liquidity is ample.

He said the downside risks to economic growth include global imbalance, the weakness in property markets in the US and some euro zone countries as well as financial market risks.

The Bundesbank is closely observing the developments in carry trades - a practice in the derivatives market where market players borrow an asset in a low interest rate currency, sells it on and reinvests the proceeds in a different asset offering a higher rate.

All these risks could lead to higher volatility on financial markets, he stated.

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