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Mersch Signals ECB May Quicken Pace of Interest-Rate Increases
June 26 (Bloomberg) -- European Central Bank council member Yves Mersch indicated the bank may step up the pace of interest- rate increases as inflation risks mount.
``We've never said that we can only act every three months and by 25 basis points,'' Mersch said in an interview today at the annual meeting of the Bank for International Settlements in Basel, Switzerland. There are several ``indications which point to increased upward risks to price stability.''
The ECB increased its benchmark interest rate by 25 basis points once a quarter since early December, to 2.75 percent now. Faster growth is giving companies room to pass on surging energy costs and labor unions to seek higher wages, increasing the risk of sustained inflation.
Crude oil prices rose 16 percent this year, reaching a record of $75.35 per barrel on April 21 in New York.
Higher energy costs forced the ECB this month to raise its euro-region inflation forecast for 2006 to about 2.3 percent from 2.2 percent. That would be the seventh straight year the bank failed to meet its aim of keeping inflation just below 2 percent. The economy will probably expand about 2.1 percent in 2006, the Frankfurt-based bank said June 8.
``Producer prices even excluding oil are showing an upward trend, which could signal a beginning of indirect effects gathering pace in the area of secondary effects,'' Mersch, who is also governor of the Luxembourg central bank, said. ``We also have a wage indicator, which has slightly increased. We see inflationary expectations very slightly inching upwards.''
Less `Stimulus'
ECB council member Axel Weber said June 23 that it's ``appropriate to continue withdrawing monetary stimulus'' if the bank's scenario for growth and inflation is confirmed.
``Present real interest rates are by large still extremely low and they're certainly not hindering economic growth to continue,'' Mersch said, echoing Weber's remarks. ``The outlook for growth close to potential in the near future is still intact also because of the accommodative monetary policy.''
The ECB says potential growth is around 2 percent.
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 3.58 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.
August Move?
Asked whether the ECB could raise rates when it decides on interest rates by telephone conference, as it will on Aug. 3, Mersch said ``that's certainly not excluded. There's no unconditional pre-commitment in this respect.''
The ECB's governing council may also consider raising key lending rates by 50 basis points, a measure last used in June 2000 under Wim Duisenberg, according to Mersch.
``We've never said that we couldn't do this,'' Mersch said. ``We've also done it in the past. It's clear that such steps are also among measures that could be taken.''
Concern global central bankers may hurt growth by raising interest rates too much has been weighing on equity markets. The Morgan Stanley Capital International World Index, a measure for stocks globally, has lost about 9 percent since reaching a six- year high on May 9.
Investors expect the U.S. Federal Reserve to raise its benchmark interest rate for a 16th month to 5.25 percent when policy makers meet on June 29. The Bank of Japan has also signaled that it's ready to end its policy of keeping borrowing costs close to zero.
While the ECB is ``increasingly unhappy with code words'' such as ``vigilance'' used in the past to signal imminent interest rate increases, the bank might ``switch earlier rather than later to the vigilance mode,'' Mersch said.
The ECB's governing council will hold its next meeting amowed by a press conference on July 6 in Frankfurt.