European Central Bank Executive Board member Joerg Asmussen said the bank could start to raise interest rates to curb inflation if the economy picks up.
“The ECB will act when needed,” Asmussen said in a speech in Berlin today. “Like last spring when the economic outlook had improved and we started carefully raising interest rates.” Still, inflation remains “in check” and will drop below the ECB’s 2 percent limit next year, he said.
The ECB increased its benchmark rate in April and July last year before reversing the steps as the sovereign debt crisis worsened, taking it back to a record low of 1 percent. While euro-area nations including Italy and Spain are in recession, price pressures are building in Germany, the region’s largest economy.
“Our primary objective is price stability and we will continue to deliver on this irrespective of persistent public debt overhangs in some euro-area countries,” Asmussen said. The currency bloc as a whole will experience “only a mild recession” and the ECB predicts that economic activity will recover gradually this year, he said.
The European Commission forecasts growth of 0.6 percent in Germany and contractions in Italy, Spain, Belgium, Greece, Cyprus, the Netherlands, Portugal and Slovenia. The euro-area economy is projected to shrink 0.3 percent.
At the same time, euro-area inflation has been above the ECB’s target since December 2010.
“Inflation rates in the euro area remain in check,” Asmussen said. “Current rates are somewhat above 2 percent, they are driven exclusively by rises in energy prices and indirect taxes. We expect inflation rates to return below 2 percent early next year.”
Asmussen said while the ECB’s three-year loans, which pumped more than 1 trillion euros ($1.3 trillion) into the banking system, have helped buy time for financial institutions and governments to implement reforms, they aren’t a solution to Europe’s debt crisis.
“The best contribution a central bank can make to employment and growth is to provide price stability and to contribute to financial market stability,” he said.
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