LUXEMBOURG (MNI) – The European Central Bank’s pre-announcement
last week of a rate hike in April is consistent with its mandate,
Governing Council member Yves Mersch said Thursday, noting that
commodity prices are likely to stay high for longer than desired.

Presenting the annual accounts of the Luxembourg central bank,
which he heads, Mersch said that the ECB’s indication that a tightening
move is imminent was “simply in conformity with our mandate.”

“We consider that it is particularly important to do what we
promised to do and, moreover, what is stipulated in the treaty,” he
explained. Although monetary authorities are attentive to the state of
financial markets, he said, “We have our responsibility and this is to
remain faithful to medium-term price stability in the Eurozone and
ensure that inflation expectations remain perfectly anchored.”

Asked whether he thought robust commodity prices were a long-term
phenomenon, he replied, “I believe that if it would only be a temporary,
technical glitch, which is linked to supply-side shortages, one could be
much more relaxed than if you would relate these hikes to long-term
demand considerations in emerging markets. And to me it appears that we
may very well stay with longer-than-wished-for levels of high energy
prices and high commodity prices.”

Mersch noted that he is “firmly in line with the opinion of the
ECB” regarding enhanced flexibility of the European Financial Stability
Facility (EFSF), and thus “calls not only for increased flexibility, but
also for an extension of the volume of the EFSF.”

The ECB only talks about EFSF flexibility and not about bond buying
by the EFSF, Mersch said, “in order not to be too precise, but it is
obvious that the instruments that are at the disposal of the EFSF need
to be more expansive than what is the case at present.”

Markets are very impatiently awaiting decisions to be taken by
European leaders over the next days and weeks, he said. “Uncertainties
are, effectively, particularly large” as a result.

In other comments, Mersch said that “uncertainties and risks
persist,” and affirmed that “adequate capitalization is indispensable”
for banks, including central banks.

–Frankfurt bureau, +49-69-720142, dbarwick@marketnews.com

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