ECB retains hawkish tone as Issing warns about oil prices and inflation

The European Central Bank (ECB) kept up its hawkish tone yesterday with chief economist Otmar Issing warning about oil prices and inflation, and Governing Council member Klaus Liebscher calling borrowing costs very low.

The ECB would raise rates as required, Issing said, although both policymakers repeated the assurances of ECB president Jean-Claude Trichet that the central bank had no plan for a series of US-style rate increases.

The ECB raised euro-zone interest rates by a quarter point to 2.25 per cent in December - its first move up in five years - and on average analysts expect a another rise in March, with rates ending the year at 2.75 per cent.

"(Trichet) made it very clear. This (December rate hike) was not the first in a series of steps. But we will always act on time," Issing told reporters.

"The risk to price stability has increased in the context of higher oil prices," he said.

The ECB forecasts euro zone inflation of about 2.1 per cent for 2006 overall, and growth of around 1.9 per cent.

Liebscher also expressed concern that the sustained high cost of oil would feed into wages and prices for other goods and services. "Without a doubt, there is still a large danger," he said, citing the German producer price index, which rose by 5.2 per cent in December, its fastest pace for 23 years.

Jens-Oliver Niklasch, economist with Landesbank Baden-Württemberg, said Issing's comments strengthened his expectations for a March rate rise.

"The tone's got sharper, and Mr Issing is not alone there. We've been expecting a March hike for a bit. Now it looks again like we're being prepared for a rate increase," he said.

Issing also warned about unsustainably fast house price growth in parts of the euro zone, unusually singling out Spain, Ireland, France and Italy as potentially affected.

Liebscher said the cost of borrowing was "very, very low" and that ECB monetary policy was "very accommodative".