ECB reaffirms inflation stance

The fight against inflation has become even more important as a result of the financial market ­crisis, a senior European Central Bank policymaker said on Tuesday as eurozone price data strengthened the case for holding interest rates.

Mario Draghi, Italy’s central bank governor, argued in Berlin that some of the worst periods of financial distress in history – for instance Japan in the 1990s – “have been associated with – and sometimes aggravated by – the inability to control the inflation process”. Lower inflation would reduce both uncertainty and risk premiums, he said.

Mr Draghi was speaking before the US Federal Reserve’s rate decision.

Eurozone headline inflation dropped to 3.8 per cent in August from the record 4 per cent in July, Eurostat, the European Union’s statistical office, said on Tuesday. But measures that stripped out oil and other volatile prices accelerated over the same period – which will fuel ECB fears that high headline rates could become entrenched. Core inflation – excluding energy and unprocessed foods – rose from 2.5 per cent to 2.6 per cent – the highest since March.

The ECB raised its main interest rate to 4.25 per cent in July and has held it at that level largely to ward off “second round” inflation effects emerging via wage and other costs.

Since the collapse of Lehman Brothers there has been no sign that its hardline stance on combating inflation has changed. ECB policymakers dislike being seen as influenced by the Fed and have pointed to the central bank’s efforts at easing financial market tensions through emergency liquidity injections.

Mr Draghi argued that a clear separation between the tasks of inflation-fighting and easing market tensions was “particularly important at the current juncture”. He said eurozone banks were faring better than those in the US.

Axel Weber, Bundesbank president, said that Germany’s financial system had in recent years improved markedly “its resilience against adverse shocks”. Few at the ECB would disagree that market disarray adds to the risk that the downturn in eurozone economic activity will worsen. Mr Draghi said the loss of confidence and liquidity in global markets was having “meaningful consequences” on the real economy in both Europe and the US.

But the ECB does not see its role as riding to the rescue of growth. Hopes that the slowdown might be over its worst were encouraged on Tuesday by a German investor confidence survey. The Mannheim-based ZEW institute said its economic sentiment indicator rose from -55.5 points in August to -41.1 points in September – the highest since April.

●Mervyn King, Bank of England governor, on Tuesday said that the monetary ­policy committee “has become firmer in its belief” that economic weakness was needed to tame inflation. UK consumer price inflation rose to 4.7 per cent in August, up from 4.4 per cent in July.

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