Saturday, September 6, 2008

Politicians step in as ECB fights inflation

Brussels, July 21 - Inflation took central stage on the European Continent with European lawmakers joining the fray with calls to the European Central Bank to reconsider its fiscal policies. In a non-binding parliamentary report, Member of European Parliament suggested the ECB should reconsider its inflation ceiling, upping political pressure on the ECB while it struggles to damp rising inflation amid signs of slowing economic growth.

The ECB, which makes monetary policy for the 15 countries that share the Euro currency, has fixed the target to keep Eurozone inflation just under two percent. The draft report by Werner Langen, a German member of the EP, and Pervenche Beres, head of the EP’s Economic and Monetary Affairs Committee urged the ECB saying that level “should be examined in the context of a new age of globalization characterised by rising energy and food prices.”

Reiterating the European Parliament’s “strong commitment to the independence of the ECB,” the report supported, “the de m a - n d for a stronger public debate on the fut ure common monetary and currency policies.’’ The draft report also recommended that the ECB’s six-member Executive Board be enlarged to nine saying, “...(its) important that a variety of backgrounds be represented among executive board members.”

With no official EP jurisdiction over the ECB, the final report — which will be put to a parliamentary vote in October — will be nonbinding but the financial pundits commented that the timing of the report is sensitive as the ECB raised its key interest rate to a seven-year high of 4.25 percent earlier this month. There has been political pressure also from several Eurozone politicians suggesting that the bank’s inflation focus jeopardises economic growth.

Earlier on the eve of Eurozone finance ministers’ meeting, German Finance Minister Peer Steinbrueck said inflation is a matter of ‘deep concern’, adding a joint effort beyond the scope of the European Union is needed to safeguard citizens’ waning purchasing power.

Luxembourg Prime Minister Jean- Claude Juncker, head the Eurozone echoed the German sentiments saying, “Inflation is a serious concern, both for the ECB and Euro governments.’’ With the present Eurozone inflation rate hovering around four percent which is double the target rate, there are signs that the Eurozone economy is also slowing amid global market turmoil.

Commenting on the subject, European Monetary Affairs Commissioner Joaquin Almunia said, “The future (of inflation) depends solely on what happens on the global markets. It is anyhow possible that next year inflation could be close to the ECB target level.”

Quoted in the Finnish daily Kauppalehti last Friday, Almunia said, “Although there is a risk of stagflation and I am worried about it, I hope we can avoid the difficult situation,” adding that economic growth in the EU had weakened in the second quarter and that inflation and market uncertainty had an impact on growth.

Although the ECB did not issue official comment on the EP report, ECB President Jean-Claude Trichet said policy makers must prevent the commodity-price shock from pushing up other prices, telling Germany’s Frankfurter Allgemeine Zeitung that, “the latest rise in unit labour costs is a piece of data that we need to take into account.”

Moreover, the policy makers were not ready to yield to political pressure became evident as ECB Governing Council member Nout Wellink was cited in the Dutch weekly magazine Elsevier last Thursday as saying that slowing growth may not damp inflation. Wellink added, “if you fail to halt inflation before it increases further ... you will have high inflation at a time of low growth.”

Across the Atlantic also the inflation got the focus with the stark warning from the US Central Bank chief Ben Bernanke last week. Addressing the US Congress, Bernanke minced no words declaring that inflation could continue to threaten the economy and rocketing petrol prices gave impetus to his words as the US inflation in June hit the largest year-over-year increase since 1991. There is, however, a marked difference as the US Federal Reserve aims to promote growth and control inflation while the ECB’s single mandate is keeping prices steady.

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