Eurozone can stand interest hikes, says ECB economist

24th March 2011, Comments 0 comments

European Central Bank chief economist Juergen Stark pushed Thursday for more normal monetary policy in remarks that suggested he felt several ECB interest rate hikes could be in order.

In an opinion piece published by the Wall Street Journal Europe, Stark asked: "Would interest-rate hikes harm economic growth in the eurozone?"

"Considering the root causes of the crisis, I don't think so," the economist said.

"We need to be mindful not to keep interest rates too low for too long," he added, while noting: "There's little discussion on how to return to normality."

Financial markets expect the ECB to raise its benchmark interest rate from the current record low of 1.0 percent at a meeting of its governing council on April 7, following a huge hint from ECB president Jean-Claude Trichet.

Trichet said however that it "is certainly not a decision on the start of a series of interest rate increases" even though inflation is climbing.

Several economists have expressed doubts about that, since similar comments by Trichet in December 2005 were followed by five rate hikes the following year, two in the first half of 2007 and one in 2008.

While another of the ECB president's comments suggested a small rate increase from 1.0 percent to 1.25 percent, "Stark certainly thinks that just one or two 25bp (hikes in basis points) wouldn't do the trick." Barclays Capital economist Thorsten Polleit told AFP.

Stark argued that accomodative monetary policies adopted to battle the financial and economic crises that first erupted in mid 2007 were no longer needed.

"The macroeconomic and financial landscape has fundamentally changed both in the euro area and at global level," he wrote.

With eurozone inflation at 2.4 percent, well above the ECB target of just below 2.0 percent, the real short-term interest rate is now below minus 1.0 percent, he noted.

"Monetary policy has become more accommodative than at the peak of the crisis," Stark said.

"The ECB needs to take account of this reality and ensure that policy accommodation does not turn into a curse," as overly cheap funds are now considered to have been a major factor in the financial crisis, he concluded.

Citi analysts said: "We expect the ECB to increase rates by 25bp in April.

"We expect a further rate hike in the third quarter and after a pause in the fourth quarter the ECB is likely to go ahead with four rate increases of 25bp each in 2012."

© 2011 AFP

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