Liebscher Says ECB to Act as Needed for Stable Prices

By Christian Vits

Aug. 22 (Bloomberg) -- European Central Bank council member Klaus Liebscher said the bank must anchor inflation expectations ``on a low level'' to avoid a wage-price spiral.

``Our central concern is to avoid second-round effects,'' Liebscher said at an event in Vienna today. The ECB ``will do what's needed'' to fight inflation.

The bank is concerned that the fastest inflation in 16 years will help unions push through demands for higher wages and prompt companies to lift prices. It kept interest rates at a seven-year high this month to contain inflation even as evidence of an economic slump mounted.

``The ECB has taken its responsibility'' by raising its benchmark to 4.25 percent in July, Liebscher said. ``Price stability is our mandate and we'll have to guarantee it over the medium term.''

Inflation in the 15-nation euro region held at 4 percent in July as oil prices soared to a record. The ECB aims to keep the rate just below 2 percent, something it has failed to do every year since 1999.

Asked whether he still sticks to July 25 remark that the ECB hasn't ``exhausted its room for maneuver'' on interest rates, Liebscher said ``in principle, I didn't change my point of view. But the colleagues in the governing council decide in every meeting on the basis of the available data and act accordingly.''

In the second quarter, Europe's economy shrunk for the first time since the introduction of the euro almost a decade ago as slowing global growth and soaring costs eroded companies' and consumers' spending power.

Since then, Eonia forward contracts show investors scaled back bets on higher ECB rates. The yield on the March contract was 4.18 percent today, down from 4.61 percent four weeks ago.

To contact the reporter on this story: Christian Vits in Vienna at cvits@bloomberg.net