ECB's Bini Smaghi Says Inflation Must Be Lowered

By Tommaso Ebhardt and Steve Scherer

Aug. 29 (Bloomberg) -- European Central Bank Executive Board member Lorenzo Bini Smaghi said inflation among the 15 countries sharing the euro is ``too high'' and must be brought below the bank's limit.

``Inflation is still high, too high,'' he said in an interview with Bloomberg Television yesterday in Cortina D'Ampezzo. ``We have a 2 percent target and we must bring it back to 2 percent -- below 2 percent.''

Bini Smaghi is the fourth policy maker this week to signal that the ECB hasn't moderated its resolve to fight inflation even as economic growth falters. Inflation in the euro area is running at twice the ECB's limit, driven by record oil and commodity prices. The Frankfurt-based bank raised its key rate to a seven-year high of 4.25 percent in July to prevent higher consumer prices from pushing up wages, entrenching inflation even further.

The euro rose as high as $1.4758 from $1.4720 after Bini Smaghi's comments were published. The yield on the Euribor interest rate futures contract for December 2009 rose as much as 4 basis points.

Bini Smaghi said the ECB has only one tool for fighting inflation -- interest rates.

Higher Rates?

``But we're not the only players. There are others,'' Bini Smaghi said. ``Everyone must adhere to this objective, which is price stability.''

Fellow Governing Council members Axel Weber and Lucas Papademos said Aug. 27 the bank may need to raise interest rates further should the inflation outlook deteriorate. Executive Board member Juergen Stark told German newspaper Sueddeutsche Zeitung earlier this week that he already sees ``broad-based second-round effects emerging.''

Their comments prompted investors to reduce bets that a cooling economy will force the ECB to lower borrowing costs.

``It doesn't seem to me that we have rates, monetary policy that's too restrictive,'' Bini Smaghi said yesterday during a roundtable discussion in Cortina D'Ampezzo.

The euro-area economy, which contracted 0.2 percent in the second quarter, is at risk of a ``genuine recession'' as a stronger currency hurts exports, house prices fall and inflation erodes purchasing power, Standard & Poors said earlier this week.

Still, ``I don't expect inflation to come down necessarily just with weaker growth,'' ECB council member Weber said in an interview published Aug. 27. ``If the economic outlook brightens somewhat again toward the end of the year and next year, which I still expect, we'll have to see if action is necessary.''

To contact the reporter on this story: Steve Scherer in Rome at sscherer@bloomberg.net