FRANKFURT (MNI) – The European Central Bank could be forced to
tighten monetary policy in the Eurozone, even if times remain tough for
certain member countries, ECB Executive Board member Juergen Stark
suggested Wednesday.

Monetary policy is still accommodative in the single-currency area,
even more so given the current strong economic momentum, the ECB’s chief
economist said in remarks prepared for delivery in Kiel, Germany.

Stark echoed comments made by other governing council members in
recent weeks, noting rising price pressures, mainly as a result of
commodity price hikes.

Due to commodity price increases, “inflation rates should still
move at around 2%, or somewhat above that — evidence of at least
short-term upward pressure on total inflation,” Stark said.

Perhaps more tellingly, and hawkishly, Stark noted that, “the
development of industrial producer prices and surveys indicate that
inflationary pressure within the production chain is rising.”

“Input prices in manufacturing have picked up again and we are
seeing a tendency” for these to be passed down to the sales price, he
said.

Stark stressed that “the current monetary policy of the ECB is
still accommodative and in light of economic developments has become
rather more accommodative.”

Noting the current ECB refi rate of 1%, Stark said that in the
ECB’s last meeting two weeks ago, “we reached the conclusion that the
current interest rate is still appropriate and that price developments
in the medium term should remain in the realm of price stability.”

“But we will observe further developments very precisely,” he
assured.

There is “at present no evidence” of medium-term inflation pressure
“from our monetary analysis,” Stark underlined. “However, should our
assessment change, we will act.”

The Council will act depending on further economic developments,
both globally and regionally, and based on individual financial markets
that are relevant to monetary policy, he said.

“A possible scenario is that the difficult market situation in
individual Eurozone countries persists, while the economic activity in
the Eurozone in aggregate continues [to evolve] positively and the
danger of higher costs and price increases could emerge,” he posited.

“Then it is our mission to counter this danger,” he said.

Stark noted that the ECB had already withdrawn many of its
non-standard liquidity measures. He added that excess liquidity has
dropped from around E350 billion at the end of June 2010 to under E40
billion last week. Over the same time period, the volume of outstanding
ECB operations has fallen from nearly E970 billion to around E540
billion.

“Because this volume of our special measures is dependent on the
demand of Eurozone banks, these reductions point to an improved market
situation,” he concluded.

Remaining measures will be rolled back in line with market
conditions and will “by no means” be kept longer than the mandate of
price stability would allow, he assured.

“We will continue to regularly examine the appropriateness of
monetary policy and will act in the event of a changed assessment,” he
said.

“It is important to become aware of the risks of a monetary policy
that is too expansive for too long,” Stark warned, reiterating a comment
he has made several times in the past.

Stark made it clear that he is not convinced by those who take a
sanguine approach toward inflation because of the subdued level of core
price increases. “It would be misleading to give too much attention to
the core inflation rate,” he said.

It is the central bank’s job to ensure the full buying power of the
euro, including for eating and transportation, he remarked.

“One of the challenges for monetary policy is the withdrawal of
non-standard measures,” Stark observed. “All measures are temporary in
nature and are justified only as unusual circumstances require.”

Confirmation of the ECB’s credibility is found “in the longer-term
inflation expectations for the Eurozone,” Stark said. “They are firmly
anchored at a low level that is in line with our definition of price
stability.”

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

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