The Wall Street Journal-20080212-Politics - Economics- ECB Seeks to Stress Inflation Remains Focus

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Politics & Economics: ECB Seeks to Stress Inflation Remains Focus

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FRANKFURT -- The European Central Bank is cautioning markets against overinterpreting its concern over the uncertainty confronting the euro-zone economy.

The ECB was perceived to have adopted a neutral stance after leaving interest rates unchanged Thursday. ECB President Jean-Claude Trichet then noted that the U.S. slowdown would affect Europe and neglected to warn, as he had before, that the ECB would act pre-emptively against inflation with rate increases.

But over the weekend and yesterday, some ECB officials appeared to change tack, noting that the euro-zone economy remains fairly healthy while inflation pressures are still strong.

Axel Weber, president of Germany's Bundesbank and one of the more hawkish members of the ECB Governing Council, said in a newspaper interview that he expects euro-zone growth this year to be weaker but still solid and that inflation remains worrisome. Speaking to the Frankfurter Allgemeine Zeitung newspaper, Mr. Weber said the ECB expects euro-zone growth to be around or slightly below the potential growth rate, which it estimates at 2%.

He also warned that inflation can't be controlled with a "wait and see" policy. Euro-zone inflation hit a record 3.2% in January, coming above the ECB ceiling of just below 2%. "'Wait and see' would signal a relaxation, which I don't consider appropriate in light of inflation rates," Mr. Weber told the newspaper.

ECB Governing Council member Michael Bonello, meanwhile, said he hasn't seen any hard evidence yet that the euro zone's economic expansion is waning amid the U.S. subprime-mortgage crisis.

Mr. Trichet also indicated over the weekend that the bank isn't ready to cut rates anytime soon. "We had no call for an increase in rates, but we had no call equally for a decrease in rates. I think it's important that those two messages are equally understood by observers," Mr. Trichet said at a press conference at the meeting of the Group of Seven industrialized countries in Tokyo.

Mr. Trichet also reiterated that the ECB has a "single needle" in its monetary-policy compass -- price stability.

In the United Kingdom yesterday, there were new signs of intensifying inflationary pressure. The U.K. input-price index for materials and fuels purchased by the manufacturing industry rose 2.6% month to month and 18.9% year to year in January, the Office of National Statistics said. The output-price index for home sales and manufactured products rose 1% in January, coming in sharply higher than December's 0.4% gain. Over the past year, these prices are up 5.7%. Excluding volatile food, beverages, tobacco and petroleum prices, output producer prices rose 1.1% month to month and 3.1% year to year.

The data pose a headache for the Bank of England, which cut its key rate to 5.25% from 5.5% last week but signaled that price gains will keep it from easing policy rapidly in months ahead.