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04/11
Tighter Monetary Policy Likely as Europe Fights Price Pressure, Weber Says
Bundesbank President Axel Weber said today that European price pressures have increased significantly and that tighter monetary policy can be expected.
Weber, who is a European Central Bank governing council member, told reporters in Washington that the ECB “countered” inflationary pressure with its interest-rate increase April 7.
“We see a significant increase in inflationary pressure,” Weber said. “We’re still of the opinion that the current monetary policy stance at an interest rate level of 125 basis points continues to be supportive of the economy and expansive.” A basis point is 0.01 percentage point.
The ECB is balancing the need for tighter policy in countries like Germany, whose economy is booming, against the risk that higher rates could exacerbate the sovereign debt crisis afflicting peripheral euro-area nations.
The euro region’s inflation rate of 2.7 percent in March, which followed a 2.4 percent reading in February, represents a “clear overshooting” of the ECB’s definition of price stability, said Weber, who’s attending the Spring Meeting of the International Monetary Fund and the World Bank in Washington.
“If global price pressure continues — there have been few signs in IMF discussions that this will change over the rest of the year — one has to expect a further normalization of monetary policy in view of the price outlook,” Weber said.
Support Reduction
Weber said he expects “banking markets to normalize” and that a further reduction of support and special measures for banks will be on the agenda of central banks in the course of this year. The ECB last week maintained its emergency program of government-bond purchases and providing banks with unlimited liquidity.
Germany’s budget deficit may shrink “in the direction of 2 percent” of gross domestic product this year, said Weber, providing an outlook that’s more optimistic than the government’s. Finance Minister Wolfgang Schaeuble, who briefed reporters alongside Weber, said earlier today he expects the shortfall to contract to 2.5 percent in 2011.
To contact the reporter on this story: Rainer Buergin in Washington at rbuergin1@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net