• Home
• /
• Business

ECB on high alert for inflation risks-Ordonez

MADRID - The European Central Bank remains on high alert against inflation risks but uncertainty on the outlook for the euro zone economy has risen, ECB Governing Council member Miguel Angel Fernandez Ordonez said on Tuesday.

Surging oil and commodity prices could feed wage price inflation, Ordonez, who is also governor of the Bank of Spain, told the finance committee of the Spanish congress.

"There is a growing risk that that change in the relative prices of raw materials is perceived as a permanent and not temporary change in inflation, and if that risk materialised and affected wage negotiations and margins, it would cause inflationary spirals at an international level, highly damaging for employment and welfare," Ordonez said.

If the ECB thinks inflationary expectations are rising, it is more likely to raise interest rates from 4 percent.

"The recent rise in the (euro) area's inflation, due in large part to upside pressures from external prices, has increased the risks of second-round effects and the loss of anchoring for expectations, which has led the (ECB) Council to say it is on high alert and determined to act to stop these risks materialising," Ordonez said.

Eurozone inflation should stay around 3 percent until the end of the year before slowly easing, although risks to that outlook existed.

The main risk to the world economy came from continued financial volatility, Ordonez said.

"The uncertainty on the performance of the European economy in the medium-term has increased," Ordonez said. "There are fundamental risks on the downside."

CENTRAL BANKS FACE COMPLEX PROBLEM

Risks of both higher inflation and lower growth were posing a monetary policy problem for central bankers, he said.

"There are doubts about the recovery capacity of the industrialised economies, especially the U.S. economy."

"There is also uncertainty about how really resistant the emerging economies are if the developed economies slow down for a longer period, and uncertainty has not diminished about the behaviour of exchange rates and their effect on global imbalances which have still not corrected," he said.

Spain poses a particularly tough problem for the ECB. Inflation is outpacing the rest of the euro zone and the economy is slowing more sharply, due to the end of a construction boom.

Ordonez said the Spanish government should avoid endangering its long-term fiscal health by boosting spending excessively to counter the slowdown and said that the adjustment in the country's property sector, which has seen a sharp slowdown, was "necessary."

There was also a danger that wage indexation could trigger an inflationary spiral in Spain, pushing up unemployment and prolonging a painful economic correction, he said.

But, while Spain needs to boost its productivity and reform its service sector, more flexible markets and a solid financial system stand in its favour, despite large accumulation of private sector debt over the past growth cycle.

"We do not have long-term problems with growth, as some European countries do, and I am not going to name names," Ordonez, said.