Mersch and Wellink ramp up ECB inflation talk

FRANKFURT/AMSTERDAM Tue Feb 22, 2011 7:34pm GMT

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FRANKFURT/AMSTERDAM (Reuters) - The European Central Bank is ready to fight inflation by increasing interest rates when needed, ECB policymakers said on Tuesday, sending the euro higher against the dollar.

Comments by Luxembourg's Yves Mersch and Nout Wellink of the Netherlands chime with those given recently by other ECB policymakers, including Executive Board members Lorenzo Bini Smaghi and Juergen Stark on Monday.

Mersch, referring to the next ECB staff economic projections, to be released in March, said the 17-country bloc's central bank might move its risk assessment towards seeing upside risks from current view of balanced inflation risks.

"I would not be surprised if we adjust our assessment of (inflation) risks compared to December," Mersch said in an interview with news agency Bloomberg.

"I would not be surprised at most colleagues concluding that we have upside risks to price stability."

Wellink told the Wall Street Journal that rising prices worried him, too.

"I do worry about short-term developments" on inflation, he said. "The overall picture is not a picture I like very much."

The euro rose steadily against the dollar from around $1.3575 to $1.3666 with traders citing Mersch's comments as being behind the rise.

The 2/10-year German yield spread narrowed by 8 basis points to 172 basis points, its tightest since late November.

"They have to anchor price expectations as early as they can," Natixis economist Sylvain Broyer said. "The ECB is a bit puzzled by inflation prospects."

TOO LOW TOO LONG?

Wellink also said current ECB interest rates could be the seed of future problems in the economy and markets, were they to be held at this level for too long.

"This is not an equilibrium rate," Wellink said. "This is really an interest rate that at a certain moment starts to distort the economic and financial process; this reason in itself is a good enough reason to increase, at a certain moment, your policy rate."

The ECB has kept its key policy rate at a record low 1.0 percent since May 2009. Analysts expect it to remain at that level until the fourth quarter of this year. <ECB/INT>

Mersch said the ECB would make its interest rate decisions independently of other central banks, raising them when the situation warrants it.

"We are fully aware that excessively low interest rates create distortions in the economy and are also likely to be a favourable field for asset inflation," he said.

It would be key to see how recent rises in oil, food and other commodity prices feed through into the economy. "We already see at the level of input prices very strong pressure," Mersch said.

He also said the ECB might change its view on growth risks, suggesting there might be more momentum on growth than fourth-quarter data showed.

This month, the Governing Council's statement saw growth risks as being slightly tilted to the downside.

On Tuesday, data showed consumer morale both in Germany and Italy rising faster than expected.

(Additional reporting by Marc Jones; Editing by Stephen Nisbet/Ruth Pitchford.)

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