ECB officials warn on inflation before rate meeting


European Central Bank officials hammered home their concerns on inflation and said growth fundamentals were sound in interviews published on Monday, days before they next meet to set interest rates.

ECB Executive Board member Lorenzo Bini Smaghi and Governing Council member Klaus Liebscher warned about inflation, with Liebscher seeing a risk of wage and price rises feeding each other.

"There is a threat of a wage-price spiral. Price rises are too strong at the moment," he said in an interview with Austrian newspaper Kurier.

Liebscher's worries on wages echo Bundesbank President Axel Weber's statement in Ljubljana in Slovenia on Saturday that German wages were rising significantly faster than expected.

The ECB's Governing Council holds its monthly rate-setting meeting on Thursday. Almost all economists expect it to keep rates on hold at 4 percent, as the central bank is torn between record high inflation and an outlook of slower growth.

“This is going to take some time before this works through," Governing Council member John Hurley told the Irish Times, saying there had been a knock-on effect from credit turmoil for growth both in the European Union and globally.

"What is good is that it has had only a moderate effect on European growth to date, although the risks are clearly to the downside," he said.

His Maltese counterpart Michael Bonello was positive about the longer-term outlook.

"The economic fundamentals of the euro zone are still sound, as we have said, and all the figures seem to suggest that," news agency Market News reported him as saying.

Nonetheless, in an interview with the Wall Street Journal, the general manager of the Bank for International Settlements said market turmoil appeared to be the worst in 60 years.

Malcolm Knight said current turmoil was "probably the most serious market turbulence in the advanced countries since the Second World War".

But Knight said there was no clear need for the world's central banks to take joint action to purchase securities hit especially badly by the subprime crisis.

"This is an aspect of liquidity provision where I'm not sure I see a necessity of lock-step coordination among central banks," he was quoted as saying. "It depends on what's happening in each country's own markets."   

Bini Smaghi told Italian newspaper Repubblica Affari & Finanza that the ECB would never act in the same way as the US Federal Reserve, which intervened to prevent US bank Bear Stearns from collapsing.

"You can't ask the European Central Bank to do this: it's not its job and it should never be," he said.

Bini Smaghi added the time was not ripe to give the ECB centralised power of banking supervision, but said there was a "good consensus" on setting common rules for national central banks.

European Union finance ministers and central bankers signed an agreement over the weekend on how to handle the failure of a cross-border bank, saying shareholders would not be bailed out by public money. (Reuters)