–Adds Comments On The EMU Economy, Money Markets, Governance Reform

FRANKFURT (MNI) – The European Central Bank is “ready” and
“determined” to take action against risks to medium-term price
stability, Executive Board member Gertrude Tumpel-Gugerell declared
Monday.

Risks to medium-term price developments remain tilted to the
upside, the central banker reiterated in remarks prepared for delivery
in Salzburg, Austria.

Furthermore, Tumpel-Gugerell did nothing to dissuade markets from
believing that a rate increase is imminent, saying that “strong
vigilance” is warranted and that the situation is worth monitoring
“closely.”

She also said that the recent spike in oil prices is “increasing
cause for concern” and that inflation in the Eurozone, which hit 2.4% in
February, “will hover markedly above 2% in the coming months on the back
of persistently elevated oil prices.”

The central bank’s objective is to keep consumer price inflation
close to but below 2% over the medium term.

“Our assessment is that the risks to medium-term price developments
are tilted to the upside,” Tumpel-Gugerell underscored. She reiterated
the central bank’s most recent staff forecasts, which foresee a midpoint
of inflation at 2.3% this year and 1.7% next year. She reminded,
however, that these projections do not take into account recent hikes in
oil prices, and they assume subdued wage pressures.

“Against this background, strong vigilance is, of course, necessary
and we are monitoring the situation closely,” Tumpel-Gugerell said,
reiterating the language of ECB president Jean-Claude Trichet at his
press conference on March 3.

Giving no hints of any dovishness, Tumpel-Gugerell stressed,
“should there be any signs of inflationary risks over the medium term,
the ECB is ready and determined to take appropriate action in good
time.”

Despite the inflation dangers, Tumpel-Gugerell stressed that, “it
is safe to assume the cyclical recovery that is underway stands on sound
foundations.”

“The fact that this view of the overall economic situation is
actually rather favourable…is due not least to the stability of the
euro, to a monetary policy stance oriented to stability and to the
decisive action undertaken in the financial crisis to stabilise the
banking sector,” she said.

Turning to monetary conditions in the Eurozone, she observed that
“in recent months, the situation in the money markets of the euro area
has improved further.”

“On the whole, banks are requesting significantly less liquidity
than before,” she confirmed. “Since last summer, an ongoing process of
normalisation has been observed in interest rate spreads in interbank
money markets (EONIA), which have more or less returned to the levels
prevailing before the onset of the financial crisis in August 2007.”

Not shying from self-praise, Tumpel-Gugerell said “these
developments are indicative of the increased trust among banks in the
euro area — a development due largely to the decisive action undertaken
by the ECB.”

She also said the decision of European governments to establish a
permanent crisis-resolution mechanism, the European Stability Mechanism,
was “an important contribution to keeping the financial system stable,
and thus to safeguarding the stability of the euro.”

“Nevertheless, the existence of this mechanism should not be seen
as an inducement to postpone a correction of the stance of economic
policy for too long and to trust in the help of other euro area
countries,” she warned.

The central banker repeated the ECB’s line that reform efforts
undertaken at the European level to improve public budgets and economic
activity “are not sufficiently extensive.”

“In fact, the Governing Council of the ECB considers that while the
proposals tabled by the European Commission may indeed go some way
towards improving macroeconomic and fiscal surveillance in the euro
area,” she asserted, “they fall short of the quantum leap forward that
is needed in the surveillance of the euro area and in order to guarantee
the smooth functioning of Economic and Monetary Union.”

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

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