FRANKFURT (MNI) – Risks to medium-term inflation developments in
the euro area could move to the upside and the ECB stands ready to act
if such risks emerge, ECB Executive Board member Juergen Stark said
Monday.

Stark said that the ECB’s easy policy stance has become
increasingly accommodative and must be normalized over time as financial
markets and the economy continue to improve. Importantly, he also
pointed out that in his view the recovery is increasingly
self-sustaining.

Stark warned that imported inflation pressures must be taken
seriously and taken into consideration when setting Eurozone policy.
Indeed, there are already early warning signals for domestic inflation,
he said.

“ECB that has already been accommodative has become even more
accommodative. In my view, risks to the medium-term outlook for price
developments in the euro area as a whole could move to the upside,”
Stark said in a speech text released by the central bank.

“To the extent that financial market conditions continue to improve
and the current economic recovery turns out to remain strong and
self-sustained, the stance would need to be normalized over time,” Stark
said.

He observed that the “economic recovery in the euro area is
increasingly self-sustaining and increasingly less dependent on state
support measures” but added that “uncertainty remains high.”

“We will act whenever we anticipate that higher costs and price
increases pose upward risks to price stability over the medium term,”
Stark said.

Stark’s assessment of the current price environment suggests such
upside risks may be developing soon.

“Inflation rates could temporarily increase further in the next few
months and are likely to stay above 2% in 2011, before moderating again.
There is continued evidence of upward pressure on overall inflation
mainly owing to energy and commodity prices,” Stark said.

In addiction, “industrial producer prices which have some early
indicator properties with respect to consumer prices have strongly
accelerated in the course of 2010 and are currently growing at rates
above 5%. Available survey data also point to increasing price pressure
in the earlier stages of the production process,” Stark observed.

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–Frankfurt bureau, +49-173-6529-331; jtreeck@marketnews.com

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