FRANKFURT (MNI) – European Central Bank Governing Council members
continued to offer assurances that they were not overly alarmed about
inflation prospects yet, after the ECB spooked markets last week by
ratcheting up of the anti-inflation rhetoric.

Nevertheless, comments by Executive Board members Juergen Stark and
Lorenzo Bini Smaghi suggest that at least in the Eurotower concerns over
inflation and ultra-low interest rates are serious.

Athanasios Orphanides, the Cyprus central bank governor, said the
ECB’s change in the introductory statement at the last monthly press
conference was not “overly hawkish.” In an interview with Bloomberg,
Orphanides suggested that markets had overreacted to the new language.

ECB President Jean-Claude Trichet, reading the statement, warned
that while inflation risks are still broadly balanced they “could move
to the upside.”

“I think the statements of President Trichet at the last press
conference have been perhaps interpreted in a rather one-sided way,”
fellow Council member Ewald Nowotny said, seconding Orphanides. He
stressed that the Council does “not see a need for an interest rate
change in the foreseeable future.”

Orphanides and Finland’s Erkki Liikanen once again pointed out that
recent price pressures were primarily driven by commodity price
increases and that “measures of the underlying inflation rate remain
rather low.”

While headline inflation in the Eurozone hit 2.2% in December,
exceeding the ECB’s price stability target of close to but below 2%, the
core rate remained at a much more moderate 1.1%.

Bini Smaghi, however, warned Wednesday against finding too much
comfort in benign core inflation data. “Core inflation can provide
policymakers with a downwardly-biased assessment of overall price
pressures and — mistakenly — suggest a pro-cyclical policy course,” he
said.

Bini Smaghi also said that loose monetary policy in the developed
world is exporting inflation to emerging economies while “accumulation
of foreign reserves by emerging market economies leads to downward
pressure on long-term interest rates in global economies.”

“This, in turn, intensifies the trends in asset and commodity
prices, thus potentially leading to further imbalances and global
inflation,” he continued. “When setting their policies, monetary
policy-makers in industrialized countries should take this dimension
into account.”

Juergen Stark warned that in emerging economies, commodity price
driven “inflation is a problem to be taken seriously.” The ECB is “very
watchful what happens on these [commodity] markets and we will do
everything to guarantee price stability” in the euro area, Stark said.

“The balance of risks [of inflation] can change very quickly, so we
must stay very vigilant,” he cautioned. He also reiterated previous
warnings that “too-low interest rates for too long” could lead to false
incentives for markets.

This should be particularly true for Eurozone core economies where
the ongoing recovery is making current interest rates increasingly
accommodative.

In Germany, the Ifo business climate indicator hit an all time high
in January as expectations improved for the fourth consecutive month.
Earlier this week, the German government raised its GDP growth forecast
for this year to +2.3% from +1.8%.

Industry morale in France improved to a 34-month high in January,
bolstered by a sharp rise in recent output and a promising pick-up in
demand, while confidence in the services sector reached a 33-month high,
the national statistics institute Insee said Friday.

However, in the less robust peripheral economies, any tightening of
monetary policy may yet hamper the recovery and could risk intensifying
the sovereign debt crisis. Inflation dangers would thus have to become
more immediate to trigger any policy change by the ECB.

Nevertheless, markets should take inflation concerns in the
Eurotower serious. The introductory statement may not have been “overly
hawkish”, but as interest rates remain low and the recovery continues,
it seems the risk assessment can only move in that direction.

In the meantime, Eurozone policymakers appear to have made some
progress in finding a replacement for outgoing European Central Bank
Executive Board member Gertrude Tumpel-Gugerell when she departs in May.

Tumpel-Gugerell will be replaced either by Slovakia’s Elena
Kohutikova or Belgium’s Peter Praet, Eurogroup head Jean-Claude Juncker
told Market News. “It is only between these two candidates,” he said.

The Slovakian candidate might face some political headwinds, since
she hails from the lone Eurozone member state unwilling to participate
in the rescue for fiscally-stricken Greece last year. On the other hand,
replacing Tumpel-Gugerell with Praet may be seen as politically
difficult since it would leave the Council without a female member.

Talks about a successor for President Trichet in October have also
heated up again. Citing “high-ranking” policy makers from Germany and
France, Germany’s Die Zeit reported that prospects for Bank of Italy
Governor Mario Draghi are dwindling. France could be persuaded to back
Bundesbank President Axel Weber for the job if it is able to appoint the
ECB’s next chief economist in return, the newspaper said.

However, French daily Liberation reported on Wednesday that
France’s President Nicolas Sarkozy remained steadfastly opposed to Weber
and was seeking an alternative candidate acceptable to Germany.

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

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