FRANKFURT (MNI) – European Central Bank staff forecasts of 1.7%
average inflation in 2012 assume rising interest rates, ECB Executive
Board member Juergen Stark said Friday, suggesting that the central bank
was planning to raise its policy rate further.

Asked whether the 2012 forecasts, which show inflation falling well
below the ECB’s price stability target of close to but below 2%, means
there is less pressure to act on interest rates, Stark stressed that the
forecasts were not those of the Governing Council.

“The projections are staff projections. We said yesterday that we
see the risks to price stability in the medium term on the upside,”
Stark said.

He also said that it is important to “consider the underlying
assumptions of these projections exercise,” pointing to the assumption
of rising short-term interest rates, no major second-round effects and
no major increase in oil prices.

After the central bank on Thursday announced a continuation of
fixed-rate full-allotment method for all its refi operations throughout
the 3Q, Stark said that an exit from unlimited liquidity supply is “still
under discussion” but that the exit was complicated by the debt crisis
and the ongoing addiction of some banks.

“The objective is to reduce over time the dependency on Eurosystem
refi operations. This is under discussion with regulators, supervisors,”
Stark said. “We are in the process of phasing out. We see this as a
normalization, but we have to deal with some banks which have no access
to interbank market,” he added.

While this “will take some time” as negotiations are ongoing, Stark
said he was confident that authorities would come up with a solution in
the months ahead. Any such solution will have to take unto account the
funding plans for banks in Greece, Portugal and Ireland that are now in
place, Stark said.

Stark stressed that the ongoing supply of liquidity does not
prevent the ECB from doing “what is necessary to assure price stability
in the medium term.”

Stark also dismissed criticism that the ECB has become a “bad bank”
as a result of bond buys and eased collateral rules for its refinancing
operations.

“It is obvious that the Eurosystem has taken additional risks on
balance sheet. This reflects the crisis,” he said. “However, we have
well functioning risk controling regime. We are not ignorant to what is
going on in markets, what is going on balance sheets.”

Risks on the ECB’s balance sheet are manageable, he asserted.

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

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