FRANKFURT (MNI) – The latest Comments from European Central Bank
Governing Council member Axel Weber offer further evidence of an
emerging split at the ECB over how to interpret the most recent
inflation readings.

“While inflation risks are low in the short-term, they are still
pointed upwards,” Weber said Tuesday.

Diverging from the official line of “broadly balanced” inflation
risks, Weber’s comments backed those of fellow arch-hawk Juergen Stark
who had warned Friday that “all in all, risks to the inflation outlook
seem to be tilted to the upside.”

Weber, who heads the Bundesbank, pointed to March’s spike in the
euro area’s harmonized consumer inflation figure to 1.4%, saying it was
“not far away” from the ECB’s price stability definition of close to but
below 2%.

Nout Wellink, on the other hand, assured that the “little bit of a
surprise” in last month’s Eurozone HICP “hasn’t changed and our
appreciation of what’s in front of us hasn’t changed during the last few
months.”

Erkki Liikanen on Tuesday observed that “price developments and the
underlying pace of monetary expansion are expected to remain moderate
over the policy-relevant horizon.”

In its World Economic Outlook, that International Monetary Fund on
Wednesday also observed that Eurozone “recovery prospects are still
sluggish, and so inflation pressures remain subdued.” It advised the ECB
to “keep interest rates exceptionally low.”

Stark and Weber, the two Germans on the Council both confirmed that
interest rates remain appropriate and that an exit from the ECB’s
ultra-loose monetary policy still appears a long way off. Nevertheless,
Weber’s and Stark’s inflation warning show that the hawks are beginning
to poke their heads above the parapet.

Weber argued for rapid action once it is time for the rate cycle to
turn.

“What can be expected from monetary policy is a symmetrical
reaction to financial imbalances meaning that quick rate cuts during a
crisis go hand in hand with quick rate rises after the crisis.”

A perfectly symmetrical approach of the kind described by Weber
would require the ECB to raise interest rates by some 325 bps within
just seven months.

The monetary policy debate in the Eurotower is becoming more lively
again.

—

(April 20, 2010):

FRANKFURT (MNI) – European Central Bank Governing Council members
continue to push for a quick activation of the Greek aid program to calm
markets and minimize mounting refinancing costs for Greece.

Meanwhile, the latest comments from Council members Nout Wellink
and Michael Bonello playing down price stability risks amid sluggish
growth suggest there is not unanimity on the Council over how to
interpret the latest inflation readings.

According to newspaper reports, Council member Axel Weber warned
German lawmakers that Greece may require up to E80 billion to avoid
default, well above the E45 billion earmarked for the first year of the
proposed rescue program. “The figures are changing all the time,” Weber
was quoted as saying. But he said there was “no alternative” to the aid
program.

Mounting Greek refining cost — the Greek/German 10-year bond
spread hit a fresh post-EMU high of +471 bps earlier Tuesday — will
only drive the cost of the aid package up further.

“I think every now and then they should show a stronger sense of
urgency” about securing aid, Wellink said in an interview with Market
News International published Monday. “It would be a good thing to come
with a program at a certain moment, and in the context of such a program
you need an activation of the [aid] mechanism.”

Wellink’s comments follow remarks from Ewald Nowotny, who said last
week that “what is necessary is really to activate the measures
foreseen.” If Greece does that, Nowotny said, “I’m sure they will have
an impact on the markets.”

A meeting of Greek government officials with the IMF, the European
Commission and the ECB to discuss details of the contingency assistance
plan was postponed from Monday to Wednesday but still remains subject to
air traffic.

However, Greek officials have already emphasized that this meeting
does not mean Greek is seeking to activate the program right now.
Negotiations are likely to last at least 10 days, Greek Finance minister
George Papaconstantinou said Tuesday.

Wellink and fellow Council member Christian Noyer downplayed the
risk of a contagion from Greece. Noyer, in a radio interview over the
weekend, described the risks of the Greece’s debt crisis spreading to
countries such as Portugal and Spain as “very remote.”

Some Council members would use the same wording to describe
inflation risks in the Eurozone, though the bank’s chief economist
Juergen Stark is not one of them. Stark warned recently that growth in
developing countries could put upward pressure on commodity prices,
leading to higher inflation rates [in Europe].

But Wellink said that given the weak Eurozone growth outlook, no
serious inflationary pressures are to be expected.

“Depending on commodity price developments especially, there might
be — or there is — the possibility of upward pressure,” he said. “But
even including that, it’s still moderate. Our appreciation of what’s in
front of us hasn’t changed during the last few months.”

Bonello and Noyer also appeared more concerned about sluggish
growth than inflationary risks.

Bonello, the head of Malta’s central bank, said Monday that the
ECB’s official interest rates are “appropriate” given moderate growth
and well-anchored inflation expectations. Noyer warned that growth is
still “fragile” and there’s “still a lot of uncertainty.”

Latest signals form the real economy do indeed reflect uncertainty
as hard data trends downward while sentiment continues to improve.

Construction activity in the Eurozone contracted at its fastest
rate in 14 months in February, Eurostat said Monday. Taking into account
revisions in previous months, February’s 3.3% monthly drop resulted in a
-15.2% y/y drop, the sharpest decline since February 1996.

The German Bundesbank on Monday warned that the Eurozone’s largest
economy is likely to have fallen back into recession in the first
quarter of 2010. “In total a slight reduction of real GDP is anticipated
for the first quarter,” the bank wrote.

However, the Bundesbank ascribed the weak performance to adverse
weather conditions and assured that for the second quarter the
indicators would show a recovery that reflects more than just “catch-up
effects.”

For the Eurozone as a whole, “rather bad” weather could leave its
mark on 1Q activity, Wellink said. He cited central bank calculations
that suggest a severe winter could shave between a quarter and half a
percentage point off GDP growth in a given quarter.

However, Tuesday’s ZEW reading should have reinforced expectations
that economic activity in Germany is picking up this spring.

Investors’ and market participants’ six-month outlook for Germany
recovered unexpectedly sharply in April after six months of decline. The
expectations index rose to 53.0 from 44.5, thus mostly offsetting recent
declines, while the assessment of current condition rose more than
expected from -51.9 to -39.2.

Further key signals will come later this week with the release of
the advance PMIs on Thursday and the Ifo business climate on Friday.

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

[TOPICS: MT$$$$,M$$EC$,M$X$$$,M$$CR$]