FRANKFURT (MNI) – European Central Bank Executive Board member
Juergen Stark sounded some hawkish notes after Thursday’s rate setting
meeting, suggesting that markets trimming back ECB rate hike
expectations on the back of benign 2012 ECB staff forecasts for
inflation may have overreacted.

“Please consider the underlying assumptions of these projections,”
Stark said. These assumptions include rising short-term interest rates,
no major second-round effects and no major increase in oil prices, he
said during a press briefing.

In his view, at least the last of these assumptions may well be too
optimistic. “Strong economic growth in emerging markets likely
contributes further to commodity price rises,” he said in a speech held
moments later.

The latest staff forecast, issued Thursday, assume average
short-term rates of 2.3% in 2012 and put HICP inflation at 1.7%. That
short-term rate assumption implies additional increases in the ECB’s
official rate between now and then, even after one in July, which is
widely considered a virtual fait accompli.

Furthermore, should commodity prices rise further, the ECB would
presumably have to push up short-term rates above 2.3% if the 2012
inflation forecast were to remain unchanged.

To be sure, Stark is one of the staunchest hawks on the Council and
the central bank has certainly not precommitted to any rate hike path,
but Stark’s comments suggest that reactions to the staff forecasts may
have been premature. Rates must be hiked “in a gradual and timely”
manner, Stark said.

Council member Jens Weidmann also cautioned Monday that “monetary
policy in the Eurozone is rather loose, and that is despite overall
solid economic growth.” Against this backdrop, “in the ECB Governing
Council we see higher price risks over the medium term that is relevant
for us. We are correspondingly vigilant,” he stressed.

For July, a rate hike can be safely expected, comments on Monday by
President Jean-Claude Trichet suggested. While he said that a hike was
“possible” and “not certain”, he added that observers should “know what
we mean because they had experienced what we have done in the past.”
Council member Jozef Makuch said Tuesday a July hike is “very likely.”

Meanwhile, the ECB so far stands firmly by its pledge not to lend
additional support in case of a Greek debt restructuring. Europe’s top
financial officials are meeting in Brussels Tuesday afternoon to discuss
a private sector contribution to the new Greek bailout package.

On Monday, Standard & Poor’s cut Greece’s long-term sovereign
credit rating by three notches to triple C and noted that a default
appears increasingly likely. According to the rating agency, Greece is
now the lowest-rated sovereign in the world, inching closer to default
status.

But for the ECB, a default remains out of the question. “No credit
event, no selective default,” Trichet reiterated on Monday. “I said we
exclude ourself from all concepts that would not be purely voluntary
without any element of compulsion.”

While conceding that the decision is in the hands of governments,
Council members warned against expecting any participation from the ECB.

Suggestions floated thus far “implicitly consider to some extent
the involvement of the ECB,” Stark observed. Such involvement — either
pertaining its own debt holdings or it collateral policies — may not be
forthcoming, Stark and others cautioned.

The ECB is well aware that any notable private sector involvement
that meets its condition of being entirely voluntary and free of
coercion is near-impossible. “It’s not very likely that a substantial
involvement of the private sector will happen” on an entirely voluntary
basis, Stark said.

Although German Finance Minister Wolfgang Schaeuble has pushed hard
for a deal that involves private creditors, he has also said that the no
deal would be possible without the approval of the IMF and, above all,
the ECB “It must not in any way come to a conflict with the European
Central Bank,” he said.

For once in this crisis, the ECB may actually not be the one to
blink first in a stand-off between fiscal and monetary authorities.
Given hardening positions on either side, however, it is unlikely that
deal will be reached today that may confirm that the ECB is getting its
way.

–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com

[TOPICS: MT$$$$,M$$EC$,M$X$$$,M$$CR$]