Liikanen says inflation risks 'real'

Euro zone inflation risks are real, European Central Bank Governing Council member Erkki Liikanen said in an interview published…

Euro zone inflation risks are real, European Central Bank Governing Council member Erkki Liikanen said in an interview published today.

"Inflation risks are real," Mr Liikanen, who is also governor of Finland's central bank, told the Wall Street Journal.
Mr Liikanen, however, acknowledged that the euro zone faces risks to economic growth, which should bring down inflation in time.

The ECB has held its benchmark lending rate at 4 per cent since June, while the US Federal Reserve and the Bank of England have cut their rates to deal with economic weakness stemming from the credit crisis.

Mr Liikanen repeated the ECB's position that its main concern is price stability, rather than economic growth. Figures last week showed that annual inflation hit a record 3.6 per cent in March, compared with the ECB's preferred level of just under 2 per cent.

"Our prime mandate is price stability," Mr Liikanen said. "And history shows that if you fail there, it's a long negative impact on growth and it's very hard to get back."

Market expectations are diminishing that the ECB will lower rates this year.

Mr Liikanen repeated the ECB's tough stance on inflation risks, which have been growing due to rising prices for food and oil.

It is worried that these higher costs could impact wages and other prices. But Mr Liikanen said that he had not seen "broad evidence" of this, and argued against the idea that big wage gains in Germany would be seen in other countries.

"Wage rounds are very much national," he said. "Germany had very strong wage restraint for a long time, which was not exported to other countries. These relationships are not mechanical."