Business life: My finance news blog

The European Central Bank is winning Europe's political leaders over to its policy of focusing on fighting inflation even as economic growth slows.

Politicians from France, Belgium and Luxembourg, who previously complained that the ECB paid too little attention to economic growth, have signaled increasing concern that inflation is eating away at voters' incomes.

“There isn't much appetite for having these inflation levels, whether you're the monetary authority or government,'' Robert Barrie, chief European economist at Credit Suisse Group in London, said. “There's a recognition that inflation is too high and broader-based support for the ECB to do something about it.''

The ECB has refused to follow the U.S. Federal Reserve and Bank of England in lowering interest rates after inflation surged since August, to reach a 16-year high of 3.6 percent in March. The bank argues that rising prices are a bigger threat to economic growth than the increase in credit costs resulting from the collapse of U.S. subprime mortgages.

The Frankfurt-based central bank is expected to leave the benchmark refinancing rate at a six-year high of 4 percent when policy makers meet in Athens on May 8, according to all 53 economists surveyed by Bloomberg News. The same day the Bank of England will probably leave its key rate at 5 percent after three cuts since December, a separate survey shows.

Less Isolated

ECB President Jean-Claude Trichet said at a meeting of European Union finance ministers in Brdo, Slovenia, that he felt less isolated in his fight against inflation.

“Those living on 300, 400, 500, 600, 700 euros can't live with runaway inflation,'' Luxembourg Finance Minister Jean-Claude Juncker said at the same meeting, where demonstrators protested against price increases. He had opposed the ECB rate increases when they started in December 2005.

As regards inflation, “the responsibility is not only put on central bankers, but also on governments,'' Juncker said on May 2.

Soaring food prices have led to political unrest around the world, with Egyptian police clashing with demonstrators and Haitian Prime Minister Jacques Edouard Alexis ousted. The World Bank says 33 countries risk suffering civil disturbances.

“Food prices are an issue everywhere for two reasons,'' ECB council member Erkki Liikanen told reporters at a central bankers' meeting today in Basel, Switzerland. “The first reason is that they have an impact on inflation. The second reason is that they impact on the situation of many poor people around the world.''

Inflation Concern

United Nations figures showed food was 57 percent more expensive globally in March than a year ago as economic growth in emerging markets such as China, India and Russia pushed up demand for commodities guaranteed payday loan pay day loans. The price of rice has doubled in the past year and wheat has climbed 65 percent. The price of crude oil has increased 78 percent.

Belgian Finance Minister Didier Reynders, who told Les Echos in October that the ECB should consider lowering rates if economic growth slows, suggested inflation concerns are now more pressing.

“We have a concern about inflation due to oil prices, also food prices,'' he said April 3. “It is important for monetary policy to do something.''

Some economists say the change of heart won't last.

“I would not expect the conversion of some leaders to the fight against inflation to last too long,'' said Laurent Bilke, an economist at Lehman Brothers International in London, who used to work as a forecaster at the ECB. Support will only hold for “as long as inflation remains the main concern for households, but will wane as signs of the economic slowdown intensify,'' he said.

`Incredible' Euro

French Prime Minister Nicolas Sarkozy returned to complaining about the euro's “incredible'' level on April 24, after fretting in February that the quickening pace of inflation “worries'' him because it lowers people's living standard.

“The ECB must have broader functions, with a majority deciding, to go beyond controlling inflation,'' Italian Prime Minister Silvio Berlusconi told reporters in Rome April 16 after winning last month's general election.

The widening interest-rate gap between the euro area and the U.S. sent the euro to a record $1.60 on April 22. The Fed has lowered interest rates seven times since September, to 2 percent, aiming to prevent a recession.

The world's biggest financial companies have posted at least $319 billion in writedowns and credit losses since the start of last year as the market for mortgages aimed at people with poor credit histories collapsed.

The cooling U.S. economy and the stronger euro are starting to take their toll on Europe. Manufacturing growth slowed for a third month in April and confidence in the economy dropped to the lowest level since August 2005.

Slowing economic growth may not necessarily bring down inflation, according to some ECB officials. Governing Council members Juergen Stark and Yves Mersch have suggested in the past three weeks that rates may not be high enough to contain inflation. Consumer prices in April rose 3.3 percent from a year earlier, breaching the ECB's 2 percent limit for an eighth month.

“The ECB has become the anti-inflation machine we wanted,'' Juncker said April 28.

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