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Garganas Says ECB May Raise Rates More Aggressively (Update1)
June 27 (Bloomberg) -- European Central Bank council member Nicholas Garganas said the bank is ready to accelerate the pace of interest-rate increases to counter higher inflation risks in the dozen nations sharing the euro.
``Should the need be for a more aggressive interest-rate adjustment, there is nothing to stop us from taking that decision,'' Garganas said yesterday in an interview in Basel, Switzerland. ``I would not rule out a higher adjustment to rates than 25 basis points,'' nor quickening the pace of increases from once every quarter, he said.
The ECB has raised borrowing costs by 25 basis points every three months since early December, taking its benchmark rate to 2.75 percent on June 8. Garganas is the sixth ECB council member in as many days to signal the bank may accelerate the pace of rate increases if it sees rising inflation risks.
``All the recent data indicate that risks to price stability are on the upside and have increased,'' said Garganas, who also heads the Central Bank of Greece. ``We have to look at them next time and see whether we have to move sooner rather than later.'' Regardless of the precise timing, ``it will be necessary to further remove monetary accommodation,'' he added.
The euro jumped to $1.2601 at 9:48 a.m. in Frankfurt from $1.2584 before the comments were published.
Faster Growth, Inflation
Concern that central banks will hurt economic growth by raising rates too much has caused global stock markets to slump in the past two months. The Morgan Stanley Capital International World Index, a measure for stocks globally, has lost 9 percent since reaching a six-year high on May 9.
Garganas said higher rates aren't damaging growth and the euro region's rate of expansion may exceed the ECB's forecasts this year and next. ``My feeling is that perhaps things will turn out to be somewhat better than projected this year and probably next year,'' he said. The bank projects growth of about 2.1 percent in 2006 and 1.8 percent in 2007.
Faster growth is giving companies room to pass on surging energy costs and labor unions scope to demand bigger wage increases, raising the risk of sustained higher inflation. Crude oil prices reached a record of $75.35 per barrel on April 21 and traded at $71.99 today, 19 percent higher than a year ago.
Garganas said a ``very strong increase in producer prices'' is an ``indication of some pass-through of past oil price increases.'' In May, producer-price inflation accelerated to the fastest pace in 24 years in Germany, Europe's largest economy that accounts for about a third of the euro region.
German Confidence
German business confidence unexpectedly rose in June, indicating the country is weathering near-record oil prices, a stronger euro and higher interest rates. The Ifo economic research institute in Munich said today that its confidence index, based on a survey of 7,000 executives, rose to 106.8 from a revised 105.7 in May.
Euro-region consumer price inflation accelerated to 2.5 percent in May from 2.4 percent in April. The ECB, which aims to keep the rate just below 2 percent, this month to raised its forecast for 2006 to about 2.3 percent and held its 2007 estimate at about 2.2 percent.
``If these projections materialize, then next year will mark the eighth consecutive year in which the inflation rate would be above 2 percent,'' Garganas said. ``This is not consistent with our price stability goal.''
`All Options Open'
The comments echo those of fellow ECB council members Erkki Liikanen, Yves Mersch, Guy Quaden, Nout Wellink and Axel Weber, who all suggested in the past week that the bank is ready to quicken the pace of rate increases if needed. The 18-member governing council holds its next policy meeting on July 6 in Frankfurt. The following meeting on Aug. 3 is typically held by teleconference as it falls during the summer recess.
``All the options are open at every meeting depending on the data, including the teleconference meeting,'' Garganas said. ``Should there be a need for an adjusted on Aug. 3, I don't see what could prevent us from taking such a decision.''
Investors have increased bets the ECB will raise rates at a faster pace. The yield on the three-month futures contract for December rose to 3.59 percent today from 3.41 percent on June 12. The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's benchmark rate since the currency's launch in 1999.
Expectations
The gain in the yield suggests some investors now think the bank may raise its key rate to 3.5 percent by the end of the year instead of 3.25 percent.
The ECB held its benchmark rate at 2 percent, the lowest level for any euro-region country since World War II, for more than two years to stimulate growth, encouraging companies and consumers to borrow money. House prices in the euro region rose 7.6 percent in 2005 after a 7.2 percent increase in 2004.
Money supply, which the ECB uses as a gauge for future inflation risks, grew the most in almost three years in April and loan growth was the fastest since the bank took charge of monetary policy in 1999.
``Low interest rates have been the main determining factor behind this very strong trend of monetary expansion, which of course indicates risks to inflation in the medium to longer term,'' Garganas said. ``We have to continue removing monetary accommodation because of the risks involved.''