Wellink Says Rates `Adequate', ECB to Act as Needed

By Christian Vits and Rainer Buergin

Sept. 12 (Bloomberg) -- European Central Bank Governing Council member Nout Wellink said he sees no need to change interest rates any time soon as the bank weighs the economic slowdown against inflation risks.

``I've always been a little bit more pessimistic on the real economy than other people,'' Wellink, who also heads the Dutch central bank, said in an interview in Nice late yesterday. Still, if so-called second-round effects endanger the bank's aim of bringing inflation below 2 percent, the bank ``would react.''

The ECB is concerned companies will raise prices to pass on higher raw-material costs and unions will push through bigger raises to compensate workers for the increased cost of living. The bank kept its benchmark rate at 4.25 percent this month, a seven- year high, to contain price growth even as the 15-nation euro region struggles to recover from a second-quarter contraction.

``The ECB isn't happy with inflation, but with everyone talking of a recession, a rate increase would be difficult to explain,'' said Karsten Junius, senior economist at Dekabank in Frankfurt and co-author of a book on the ECB. ``That's why they'll keep rates on hold into 2009.''

``From the beginning I had the feeling that we were in for a little bit more prolonged period of slow growth and this is still my view,'' Wellink, 65, said. ``I think we should congratulate ourselves at the end of the second half of next year if our economy is again back on track'' and growing by about 2 percent.

Shrinking Economy

Europe's economy shrank 0.2 percent in the second quarter from the previous three months and may not recover in the third as exports falter and consumer spending slumps. The contraction was the first since the introduction of the euro in 1999.

Interest rates are ``adequate'' and there's no need to change them ``at this very moment,'' Wellink said. While a cooling economy and falling oil prices may have a positive impact on inflation, ``it all depends on a very large extent on how wages are going to behave in the period ahead.''

Wellink's Portuguese counterpart, Vitor Constancio, told reporters in Nice today that inflation would slow in 2009.

IG Metall, Germany's biggest labor union representing 3.5 million workers, said Sept. 8 it will seek a pay increase of between 7 percent and 8 percent when wage negotiations start on Oct. 2. That would be the biggest wage increase in at least 16 years. Workers at Ireland's Electricity Supply Board are demanding an 11.25 percent raise.

``There is reason to be worried'' about wages, Wellink said.

`Unknown Factor'

The ECB raised its inflation projections this month to around 3.5 percent for 2008 and 2.6 percent for 2009. Wellink noted that it's ``still possible'' that average inflation will fall below 2 percent in 2010. At the same time, ECB staff lowered their growth forecasts for this year and next to about 1.4 percent and 1.2 percent respectively.

While the ``trough'' in economic growth may be over in the fourth quarter ``there is quite a lot of uncertainty,'' Wellink said. He added that the impact of the recent financial market turmoil on the economy is an ``unknown factor.''

The U.S. housing slump has driven up the cost of credit and roiled financial markets for the past year. The world's biggest financial companies have posted more than $500 billion in writedowns and credit losses after the subprime mortgage market collapsed.

Lehman Brothers Holdings Inc. announced the biggest loss in its 158-year history on Sept. 10, as devalued real-estate assets led to $5.6 billion of writedowns in the third quarter. The New York-based investment bank's market value dropped 70 percent in the past three days.

Wellink said investors shouldn't react too quickly to news.

``If you're overreacting immediately then you have to address that overreaction the next day,'' he said. ``That is what's also happening now with respect to the stocks of certain financial institutions. I always say, don't react too quickly, reflect on it a bit longer.''

To contact the reporters on this story: Christian Vits in Nice at cvits@bloomberg.net; Rainer Buergin in Nice at rbuergin1@blomberg.net