Stark Says ECB Will Raise Interest Rates If Needed to Restrain Inflation

European Central Bank Executive Board member Juergen Stark said the bank will raise interest rates if necessary to keep inflation in check.

“We’re prepared to act decisively and immediately if needed,” Stark said at an event in Frankfurt last night. “The objective is pretty clear. In order not to risk un-anchoring inflation expectations, we have to change the monetary policy stance if need be.”

Stark is the latest policy maker to signal the ECB is moving toward raising borrowing costs in coming months after inflation breached its 2 percent ceiling, accelerating to 2.4 percent in January. Officials may be laying the groundwork for a shift in policy bias at their next meeting on March 3, when the central bank is due to publish its latest inflation forecasts.

Executive Board member Lorenzo Bini Smaghi said yesterday that with the 17-nation euro-area economy gathering strength, the ECB may need to reassess whether its benchmark rate is still appropriate at a record low of 1 percent.

The ECB may raise its key rate by a quarter-point in September, Eonia forward contracts show.

“Risks to the medium-term outlook for price developments in the euro area as a whole could move to the upside,” Stark said. “I can assure you that we will act quickly and decisively on any indications” of a wage-price spiral and higher inflation expectations, he said.

Oil, Wages

Crude oil prices have surged 24 percent over the past six months, pushing up import prices and adding to pressure on labor unions to secure bigger pay increases for workers.

In December, the ECB predicted inflation will average 1.8 percent this year and 1.5 percent in 2012.

Stark said inflation is now “likely to stay” above 2 percent through 2011 before moderating in 2012. The ECB must take “seriously” the warning signals for more persistent upward pressure on prices, he said.

ECB President Jean-Claude Trichet reiterated on Feb. 19 in Paris that inflation risks could move to “the upside.” The same day, Bundesbank President Axel Weber said inflation pressure is increasing and “clearly there are risks to the upside.”

ECB council member Athanasios Orphanides told Dow Jones in an interview published yesterday that inflation may stay above 2 percent “somewhat longer than we expected before” and the bank “must be ready to act as appropriate to safeguard price stability.”

Faster growth may fan inflation, even as some of the euro region’s peripheral nations remain mired in a sovereign debt crisis.

Business confidence in Germany, Europe’s largest economy, surged to a record this month and expansion in the euro region’s service and manufacturing industries accelerated to the fastest pace in more than four years, reports showed yesterday.

“Latest economic developments suggest that the monetary policy of the ECB, that has already been accommodative, has become even more accommodative,” Stark said. “To the extent that financial market conditions continue to improve and the current economic recovery turns out to remain strong and self- sustained, the stance would need to be normalized over time.”