European Central Bank Executive Board member Juergen Stark said the acceleration in Euro zone inflation to 3.7% in May, the highest rate recorded since the launch of the Euro is a cause for alarm.
"The current annual inflation rate in the Euro zone of 3.7% in May is unacceptably high. This is cause for alarm and for heightened alertness", said Stark during a speech in Cologne. "Inflation could remain high for a protracted period and before eventually declining gradually", he added. In similar terms another ECB Executive Board member Lorenzo Bini Smaghi said that "an increase, which I would describe as significant even if it was only by 25 basis points, should be effective to bring inflation down within the 2% target in the next 18-24 months". Mr. Bini Smaghi was speaking to Italian business daily Il Sole-24 Ore. Stark said the ECB Governing Council therefore needs to consider a hike in interest rates. "Given the price dynamics and the continuing, if not increased, risks to price stability, along with clear declines in real interest rates, I consider it advisable to review the appropriateness of the current level of leading interest rates", said Stark. ECB President Jean-Claude Trichet signaled earlier this month that the central bank may raise rates by "a small amount" at its July 3 meeting. However ECB officials have since been at pains to suggest that an increase then would not be the start of an ongoing series of rate raises. Stark pointed to wage rises as of particular concern. "It's alarming to see increasing tendencies in price and wage-setting behavior in important areas of the Euro zone which point to second-round effects". "Inflation expectations are still well anchored at a level which corresponds to our definition of price stability. But the longer the period of elevated inflation rates persists, the bigger the risk that this anchor will be shaken loose". Stark concluded arguing that the Euro zone economic fundamentals are sound, but second quarter growth is likely to show a correction from the unexpectedly strong first quarter growth rate.