ECB vows to prevent second-round inflation

 

The European Central Bank is determined to stop current high euro zone inflation rates from becoming entrenched, Vice President Lucas Papademos said in a newspaper interview published on Saturday.

Papademos told Greece's Ta Nea newspaper that the rise in inflation to 6.5-year highs above 3 per cent was driven by oil and agricultural prices.

"Because it is projected that inflation will remain at a high level before it gradually declines in the course of 2008, it must be ensured that the temporary but protracted acceleration of inflation will not acquire a permanent character," he said.

"It is especially important that second-round effects on prices of these exogenous factors are avoided and that inflation will come down to a lower level, below 2 per cent, which is consistent with price stability."

The ECB has held interest rates at 4 per cent during the last five months of financial market turbulence but expectations are growing that it will have to abandon its tightening bias and follow other major central banks in easing monetary policy.

Papademos said financial integration had to be accompanied by adequate risk management and prudent and more disciplined investor behaviour.

"At this juncture, central banks should continue to aim at price stability and contribute to financial stability and the establishment of a climate of confidence," he said. (Reuters)