Weber Says Investors Understood ECB Rates Message (Update1)
By Matthew Brockett
June 6 (Bloomberg) -- European Central Bank council member Axel Weber said financial markets, which expect an interest-rate increase in July, understood the ECB's message when it stepped up its inflation-fighting rhetoric.
The ECB ``sent a clear signal to markets and to the broader public yesterday, which seems to have been well understood,'' Weber said in a speech in London today. The current ``outlook on inflation is not acceptable for a stability-oriented monetary policy,'' he said.
ECB President Jean-Claude Trichet said yesterday the central bank may raise its benchmark rate by a quarter-point to 4.25 percent next month to curb inflation, which is running at the fastest pace in 16 years. Investors responded by increasing bets on higher borrowing costs. They now expect the ECB to lift the key rate in July and again in October, taking it to 4.5 percent, according to Eonia forward contracts.
Euro-region inflation accelerated to 3.6 percent in May. The ECB aims to keep the rate just below 2 percent -- its definition of price stability.
``Even under the optimistic assumption that recent dynamics in commodity prices diminish over the projection horizon and that there will be no broad-based second-round effects, monthly HICP inflation rates will stay above our definition of price stability far into 2009,'' Weber said. ``And the risks to this outlook are clearly on the upside.''
The ECB yesterday raised its forecasts for inflation, predicting it will average about 3.4 percent this year and 2.4 percent in 2009. Economic growth will slow to about 1.5 percent next year from 1.8 percent this year, the projections show.
`Solid Fundamentals'
``The euro area remains on solid fundamentals with regard to real economic growth,'' Weber said. ``While we will see a moderation in growth rates over the coming quarters,'' it is ``evident that the current cycle is resilient and robust.''
Weber said that the European economy is ``at a different juncture'' to the U.S., though there are ``pockets of weakness'' in the region's housing market.
Weber, who heads Germany's Bundesbank, last month called for the ECB to consider raising interest rates.
While Trichet said an increase is only a possibility, Weber told German broadcaster ARD yesterday that the central bank ``will amow words with action.''
Weber told an audience of academics and bankers today that rates are ``too blunt'' an instrument to deal with asset-price bubbles. He also said that central banks may be able to ``lean against the wind'' and prevent real-estate bubbles by improving measurement of housing costs.
``Real estate is something we should focus more on,'' said Weber.
To contact the reporter on this story: Matthew Brockett in Frankfurt at
mbrockett1@bloomberg.net.
Last Updated: June 6, 2008 14:27 EDT