Stark Says ECB Will Raise Interest Rates at Appropriate Pace
April 12, 2011, 10:07 AM EDTBy Gabi Thesing and Sophie Leung
(Updates with Fed comment in sixth paragraph.)
April 12 (Bloomberg) -- European Central Bank Executive Board member Juergen Stark said the bank will raise interest rates and withdraw other emergency measures at an appropriate pace.
“The ECB will adjust its policy interest rates and its provision of liquidity at a pace and to a degree commensurate with the evolution of risks to price stability and as appropriate to maintain an orderly and functional monetary policy transmission,” Stark said in a speech in Hong Kong today. “As with the phasing-in of non-standard measures, there are no pre-defined steps between phasing them out and exiting from very low policy interest rates.”
Stark’s comments indicate the Frankfurt-based ECB has embarked on a gradual tightening cycle even though President Jean-Claude Trichet said last week’s rate increase, the first in almost three years, wasn’t necessarily the start of a series. Officials are balancing the need for higher borrowing costs in countries like Germany, whose economy is booming, against the risk that they could exacerbate the sovereign debt crisis afflicting peripheral euro-area nations.
The ECB on April 7 lifted its key rate to 1.25 percent from a record low of 1 percent to stem faster inflation. At the same time, it maintained programs to provide unlimited liquidity to banks and purchase the bonds of debt-strapped governments.
‘More Normal’
These “non-standard monetary policy measures are an extraordinary response to exceptional circumstances” and are “temporary in nature,” Stark said. “A return to a more normal liquidity management and to a more moderate scale of central bank intermediation is warranted to avoid distortions in financial incentives with longer-term adverse consequences for the economy.”
The ECB’s stance contrasts with that of the U.S. Federal Reserve, which is mandated to contain inflation and nurture economic growth and is reluctant to raise its key rate from near zero. Speaking at the same event as Stark in Hong Kong today, Federal Reserve Bank of New York President William C. Dudley said the U.S. economy is “far away” from what the Fed aims for in terms of employment and job creation.
Dudley’s comments suggest the Fed will maintain its quantitative easing through June as planned and that “U.S. rates are not going up anytime soon,” said Nick Kounis, an economist at ABN Amro in Amsterdam. “The remarks of the ECB and Fed officials emphasize the chasm that has opened up between the direction of monetary policy on either side of the Atlantic,” he said.
Inflation Breach
The policy divergence is driving the euro up against the dollar. It reached $1.45 today for the first time since January 2010.
Stark suggested the ECB can keep raising rates while leaving some non-standard measures in place, saying they can “coexist with any interest rate level.”
“The maintenance of price stability over the medium term guides all monetary policy decisions,” he said.
Inflation breached the ECB’s 2 percent limit in December and accelerated to 2.6 percent last month, the fastest pace in more than two years. The ECB aims to keep inflation just below 2 percent.
Policy makers will follow last week’s rate increase with 25 basis-point steps every three months, taking the benchmark to 1.5 percent in July and 1.75 percent in October, according to the median of 20 estimates in the Bloomberg News survey. The pattern will continue in 2012 with increases every quarter, so that the key rate reaches 2.75 percent before the end of next year, the survey shows.
--Editors: Matthew Brockett, Andrew Atkinson
To contact the reporters on this story: Gabi Thesing in London at gthesing@bloomberg.net; Sophie Leung in Hong Kong at sleung59@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
