ECB policymakers stress inflation worries

Eurozone inflation risks are still on the upside, European Central Bank policymakers said on Saturday, keeping alive the chance of interest rate rise once the turmoil on financial markets abates.
While the ECB has made it clear future rate decisions are heavily dependent on the economic impact of the market turmoil, policymakers said the central bank was still determined to head off threats to price stability in the 13-nation region.
Euro-zone inflation slowed to 1.7 percent in August and has been below the ECB's 2 percent ceiling for 12 straight months, but Governing Council members warned it could still rebound.
Austria's Klaus Liebscher said oil prices - which remain close to a record $80 per barrel - were one inflation risk and the ECB had to keep a close eye on developments. "Upside risks are prevailing with respect to inflation - oil prices, basic foodstuffs that are getting more expensive, higher wages driven by the good economic situation," he told Austria's Der Standard newspaper.
"So, very, very careful observations will be necessary. We are going into the next period without firm targets in interest rates and will be examining incoming data closely."
The ECB held off raising rates and left benchmark lending costs at 4 percent at its last meeting. Although many economists still expect a hike to 4.25 percent by year's end, UBS has dropped its forecast for further hikes and now sees rates on hold through 2008 given the increased risks to growth, while Commerzbank expects the next move to be a cut.
Netherlands central bank chief Nout Wellink and Finland's Erkki Liikanen backed Liebscher's concerns about inflation, although Portuguese central bank governor Vitor Constancio said earlier this week slower growth and the strong euro would dampen some inflation pressures.
"I think that risks are still on the upside," Wellink told reporters after attending talks with European Union finance ministers and central bankers in Porto, in northern Portugal. Asked if he was worried about the strong euro, which hit a record high against the US dollar this week, he said: "No".
Liikanen, in an interview with Finnish daily Turun Sanomat, said it was clear the turmoil would have a negative impact on economic growth but also stressed the upside price risks. "Most important is to keep long-term inflation expectations anchored. Now we are following closely economical developments, analysing where the uncertainty leads," he said.
Italian central bank governor Mario Draghi said the ECB's moves to pump extra funds into jumpy money markets should not be taken as a signal on official interest rates, which were still supporting the economy. "Monetary policy depends on the prospects for price stability .. and the real economy," he told a news briefing in Porto.