FRANKFURT (MNI) – Eurozone inflation rose more than expected in
April, raising pressure on the European Central Bank to tighten monetary
policy even as economic sentiment weakened notably.

Eurozone consumer price inflation exceeded expectations to hit a
30-month high of 2.8% year-on-year, according to preliminary Eurostat
data released Friday. No details are available yet, but the strong
reading was likely the result of higher energy costs and the impact of a
late Easter holiday.

But even if one-off factors played a role, today’s data point to a
significant upward revision for ECB staff forecasts in June from the
current 2.3% midpoint. This will add pressure on the central bank to
tighten its monetary policy stance further and could even prompt it to
raise rates as soon as June rather than as previously expected in July.

On the other hand, the Council’s confidence in the strength of the
Eurozone recovery may have weakened after the European Commission’s
economic sentiment indicator dropped for the second consecutive month to
the lowest level since November. An unexpected slowdown of bank lending
to consumers and businesses in March may further add to concerns.

Meanwhile, Eurozone unemployment remained steady at an elevated
9.9% with regional data once again highlighting pronounced divergences
across the region and the vast challenges faced by peripheral countries.
In Spain, the jobless rate rose sharply in the first quarter to 21.3%
from 20.3% in the last three months of 2010, the Spanish statistics
agency, INE, reported.

The latest data certainly has not made the task of the ECB — or
predicting its policy path — any easier. Markets will listen closely to
President Jean-Claude Trichet’s press conference following Thursday’s
Governing Council meeting. Any mention of “strong vigilance” on
inflation would probably mean a rate hike in June.

Trichet is unlikely to make any commitments regarding the ECB’s
exit from non-standard measures, since no decision is required before
the June meeting. The latest comments from Council member Yves Mersch,
echoing those of Executive Board member Juergen Stark, suggest that the
bank is keen to resume its exit.

“We are committed to a gradual exit from this type of measures,”
Mersch said. “The restructuring of banks is not the task or objective of
the central bank.”

Meanwhile, it appears increasingly clear who will lead the ECB
through the difficult times ahead after Trichet’s mandate ends on
October 31: Mario Draghi.

After a number leading Eurozone policymakers — including French
President Nicolas Sarkozy and Eurogroup head Jean-Claude Juncker —
expressed their support for Draghi in recent days, only the consent of
German Chancellor Angela Merkel is needed to clear Draghi’s ascent to
the executive suite of the Eurotower.

After previous hostile attacks, followed by tentative support in
late March, Germany’s all-important tabloid Bild-Zeitung has now thrown
its full weight behind Draghi. Dismissing its previous stance that
Draghi’s Italian roots imply hereditary inflationary tendencies, Bild
praised Draghi in Friday’s edition as “rather German, even truly
Prussian.” The paper even awarded Draghi honorary German citizenship.

Bild, which is known for its close ties to Merkel’s CDU party, may
well have been flying a trial balloon for Merkel while at the same time
seeking to foster popular support for Draghi before the government makes
a commitment. Berlin is leaving its options open as long as possible in
case it needs to react to a potential popular backlash against Draghi.

Draghi’s appointment would require Executive Board member Lorenzo
Bini Smaghi, another Italian, to vacate his post for a Frenchman. French
Treasury head Benoit Coeure or Ambroise Fayolle, France’s administrator
at the IMF and World Bank, have been named as possible candidates.
Xavier Musca, Secretary General at the Elysee Palace — essentially
Sarkozy’s chief of staff — had also been named as a potential
candidate, but according to recent news reports, he is not available.

This is not where the imminent personnel changes at the ECB end.
Bini Smaghi may or may not take Draghi’s position at the Bank of Italy.
If he does not get the post, he will be departing not only from the
ECB’s Executive Board but also from its Governing Council. Alternative
candidates to replace Draghi in Rome include Treasury head Vittorio
Grilli and Ignazio Visco, the Bank of Italy’s deputy director general.

At the end of this month, Executive Board member Gertrude
Tumpel-Gugerell will be replaced by Belgium’s Peter Preat. At the end of
June, Nout Wellink will leave his job as head of the Dutch central bank.
The Dutch government said earlier this week that it has no short-list
for a potential successor yet, but the bank’s Executive Director Lex
Hoogduin and Jeroen Kremers of RBS Nederland have been mentioned.

In a surprise announcement Friday afternoon, the Maltese government
said that Governing Council member Michael Bonello will also resign at
the end of June to be replaced by Josef Bonnici, a Maltese central bank
director and professor of economics.

The most imminent change will come Monday, when Jens Weidmann
starts his eight year term as the president of the Bundesbank. Weidmann,
who was a student of the outgoing Axel Weber, is said to share Weber’s
hawkish policy views. However, a quieter personality and long political
experience suggest that he may be more diplomatic and consensus-seeking
than his predecessor.

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com

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