Wellink Says Second Quarter `Won't Look That Good'

By Jurjen van de Pol

Aug. 8 (Bloomberg) -- European Central Bank council member Nout Wellink said the euro-region economy ``deteriorated pretty quickly in the second quarter'' and growth ``won't look that good.''

``It is not going very well, let me say that,'' Wellink, who heads the Dutch central bank, told Dutch RTL television today. The third quarter won't be great either, Wellink told Dutch television NOS in a separate interview, adding he hopes growth will pick up in the fourth.

``It is partly a cyclical movement and partly there are structural adjustments ongoing in our economy, mainly as a result of the increased energy and food prices,'' Wellink told RTL. ``And there's a crisis in the financial world.''

The ECB yesterday kept its benchmark rate at 4.25 percent and President Jean-Claude Trichet said growth will be ``particularly weak'' through the third quarter. While the central bank remains concerned that the fastest inflation in 16 years is helping unions push through demands for higher wages, record energy costs and the stronger euro are damping economic expansion.

Wellink said there was ``broad agreement during the meeting, including myself, on not doing anything at this time'' with interest rates. Still, ``there was great concern about inflationary developments,'' he said.

Euro-region inflation accelerated to 4.1 percent in July. The ECB, which raised rates on July 3, aims to keep inflation below 2 percent.

`On The Tight Side'

Wellink said while last month's rate increase will help the ECB achieve price stability, the bank would act again if it saw evidence that it needed to.

``Our monetary policy is on the tight side,'' Wellink said. ``We think that at the moment our current policy will make an important contribution to stabilizing inflation and inflation expectations, but we are standing by if necessary and we are following the figures very precisely.'' The ECB ``keeps all options open,'' he added.

The euro-region economy contracted 0.2 percent in the second quarter from the first, according to the median estimate in a Bloomberg survey of economists. Second-quarter growth data for the 15-nation region will be published on Aug. 14.

The Dutch economy, the fifth-largest in the euro zone, will ``slow heavily'' this year and even further next year, Wellink said without providing figures. ``Dutch growth in 2008 is highly influenced by the spillover effect from the last two quarters of 2007. This effect will be small next year and will result in a lower figure.''

The Dutch central bank earlier forecast economic growth will cool to 1.5 percent next year from 2.4 percent this year. Wellink said European and Dutch wages were accelerating and urged unions, employers and the government to prevent a wage-price spiral, adding Dutch inflation might reach 4 percent early next year if people aren't careful.

The government shouldn't increase the value-added tax to 20 percent from 19 percent as it plans to do in January, Wellink said. He estimates the tax rise will contribute 0.5 percentage point to the inflation rate.

To contact the reporter on this story: Jurjen van de Pol in Amsterdam jvandepol@bloomberg.net