–Adds Weber Comments On Exiting From Emergency Liquidity Ops

FRANKFURT (MNI) – Early monetary tightening by the European Central
Bank is warranted to counter inflationary pressures that may be more
permanent than currently projected, ECB Governing Council member Axel
Weber said Tuesday.

ECB President Jean-Claude Trichet on Thursday hinted very strongly
that the central bank will raise rates at the upcoming monetary policy
meeting in April.

Market reactions to Trichet’s press conference last Thursday were
“warranted,” Weber said later in an interview with Bloomberg TV. “The
expectation of interest rate moves was put forward. This was absolutely
desired.”

Weber went further than Trichet, noting that “at this point” he
“would not do anything to correct market expectations” of ECB interest
rates rising to 1.75% by the end of the year, from the current level of
1%.

The head of the Bundesbank warned that he “sees significant future
price increases” that would justify such a move. He noted that while the
ECB staff’s forecast of 1.7% HICP in 2012 denotes medium-term price
stability, it is based on a number of technical assumptions that may not
materialize.

“Inflation risks are clearly to the upside,” Weber said. “I feel
more genuine pressure on prices than is priced into the projections.”

Noting that both economic activity and inflation were revised
upwards a number of times already, and that it could happen again, Weber
said that he “wouldn’t take these technical assumptions that everything
goes back to 2% inflation at the long horizon.”

In particular, he said that oil futures, now signaling a reduction
in prices, are not necessarily a reliable indicator. “I don’t fully
subscribe” to oil prices falling back, Weber told Bloomberg.

In fact, a number of indicators “suggest that price increases could
be more permanent and fundamental than regressive forecasts show,” Weber
said, citing permanent wage increases in the emerging economies and a
durable rise in food demand.

“I believe that one has to counter-steer early on” to avoid
inflationary pressures, which are already discernible in the early
stages of the production cycle, from broadening, he said.

Weber also warned that prices in Germany, which in the past tended
to drive down the Eurozone’s inflation average, could well have the
opposite effect on aggregate Eurozone figures in the future if inflation
expectations do not remain well anchored and second-round effects are
more pronounced than in the past.

For 2011, the Bundesbank projects inflation of around 2%. Only if
no second round effects emerge could inflation drop below the price
stability target of close to but below 2%, Weber said.

Weber reiterated that the ECB is keeping its monetary policy and
non-standard policies completely separate but said that extraordinary
liquidity support should also be phased out further as markets continue
to improve.

“We never enter a room with no exit. So, it’s pretty clear that all
the non-standard measures we took basically self-exited,” Weber said.

He said while there are still some strains on certain segments,
overall, the banking sector has continued to recover, calling for a
resumption of the central bank’s exit.

Weber suggested that the ECB might first end the fixed-fate full
allotment method for three-month operations and then progressively move
towards competitive bidding in all tenders.

“I think, with financial markets improving, there is a point in
going back to regular tendering procedures,” he said. “At least for the
three-month and one-month operation – that will come in the next few
months.”

–Frankfurt bureau, +49-173-6529-331; frankfurt@marketnews.com

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