–Adds Additional Comments On ECB Bond Buys, Monetary Policy, Greek debt

FRANKFURT (MNI) – The European Central Bank has not decided to rush
into a series of interest rate hikes, but rates in the Eurozone remain
at historical lows and rising headline inflation is posing risks, ECB
Vice President Vitor Constancio said Monday.

“As President Jean-Claude Trichet said…we have not decided to
rush into a series of further rate increases,” Constancio said in the
Economic and Monetary Affairs Committee of European Parliament, where he
was presenting the ECB’s Annual Report 2010.

“When headline inflation goes up — and the last flash estimate is
already 2.8% — we know that risks of second round effects emerge very
quickly,” the ECB vice president cautioned. The central bank must look
at headline inflation to anchor inflation expectations, he added.

Constancio dismissed criticism that ECB monetary policy tightening
might hurt the debt-troubled peripheral member states, noting that the
central bank’s policies are and can only be targeted at the Eurozone
average.

Ongoing sovereign debt tensions, “and they are very serious, are
not derailing the Euro area as a whole,” he said, adding that this
explains the ECB’s policy course thus far.

The ECB will hold its next monetary policy decision on Thursday and
is widely expected to keep interest rates unchanged at 1.25% but signal
a further rate hike for either June or July.

On the subject of the ECB’s non-standard policy measures,
Constancio noted that the central bank has not recently used its
Securities and Markets Program to intervene in the sovereign debt
market. “The program has not been eliminated, but it has not been used,”
he said.

The central bank’s abstention from bond buying for the past five
weeks can be partially explained by the existence of IMF/EU bailout
programs and the fact that the recent increase in government bond
spreads were largely driven by rumours about Greek debt restructuring,
Constancio said.

“There are many people and institutions that are interested in
keeping alive these rumours,” as they stand to gain from a
restructuring, he said, appearing to suggest that the ECB would not let
itself be taken hostage by such speculators.

Constancio reiterated the official ECB line that a restructuring of
Greek debt was not on the table. “There are programs…they are in
place, they are to be applied and compiled with,” he said. While there
may be changes to them and they “are not fixed things by nature,” one
should not prematurely expect that the program won’t work, Constancio
said.

He also called on the Greek government to boost its fiscal
consolidation and reform efforts and push ahead with privatization plans
to restore market confidence. A rigorous implementation of Greek
privatization measures should improve confidence in the Greek program,
he argued.

–Frankfurt bureau tel.: +49-69-720142. Email: jtreeck@marketnews.com

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