The European Central Bank is prepared to shift to a restrictive monetary policy if needed to keep inflation under control in an economy growing faster than expected, ECB Governing Council member Axel Weber said.
The ECB did not see rates as "appropriate" at this point, nor in line with price stability, Weber told the Financial Times newspaper in an interview published on Tuesday. "What is pretty clear at the moment is that we are in a stronger than previously expected recovery," Weber said. "If necessary, we also have to move into a territory that is portrayed as restrictive, if that is needed to control to control inflation," he told the FT and its sister paper the FT Deutschland.
"The current cycle of interest rate hikes has not reached its end."
Markets have already priced in a quarter point ECB rate increase to 4 percent on June 6, roughly in the middle of a range that most analysts view as neither restrictive nor loose for the eurozone economy. Weber's comments, in his second interview published on Tuesday, suggested that the Bundesbank president sees further tightening possible after that.
He also told the Boersen Zeitung that even though eurozone inflation was under 2 percent, he saw cyclical upside risks and high liquidity which means the ECB may have to be more restrictive.
Weber told the FT economic data would determine the pace of rate moves ahead. The ECB had signalled "that now the degree of data dependence has increased in our monthly judgement of all incoming information," he said.
Against this backdrop, he noted that there are "first indications" of capacity constraints in parts of the euro economy and domestic pressures in general are replacing external factors as inflationary risks for the region. ECB President Jean-Claude Trichet had noted capacity constraints in his news conference earlier this month.
Weber told the FT that the ECB's use of code words to point to the direction of its monetary policy path "cannot replace a deeper analysis of economic and monetary developments". "What is more important for monetary policy is to give some medium term orientation on how certain information that comes in is processed." Since late 2005, the ECB has used a system of code words to indicate the pace and timing of interest rate hikes as the eurozone emerged from a period of record low rates.
Monitoring prices risks "very closely" signalled that a hike was at least two months away, while "strong vigilance" flagged one the following month. Weber said these words might be useful to some players in financial markets to provide broad hints.
But he said: "When I talk to market people and to the general public, code words are probably the least helpful part of the communication ... In an economic environment with conflicting signals, it helps to lay out and communicate the broad-based analysis from which we draw our conclusions." The FT said Weber indicated that the ECB would overhaul its communication strategy once the current tightening cycle ends.