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ECB ready to raise rates further, says Bundesbank

The European Central Bank is ready to raise eurozone interest rates further and will not put off any such moves to avoid potential clashes with politicians, Bundesbank President Axel Weber has said.

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Quizzed by the daily Frankfurter Allgemeine Zeitung Friday about recent attacks by top French politicians on the ECB's independence, Weber insisted that the guardian of the euro would not bow to political pressure and would press ahead with further rate rises if necessary.

As the head of the German central bank, Weber sits on the ECB's decision-making governing council.

Asked by the newspaper whether the guardian of the euro would forego further rate increases temporarily so as not to fuel political anger, particularly in France, Weber replied: "One hundred percent no! That has no influence on our deliberations. It would be damaging if it did."

"The frequent criticism in France of the ECB President is aimed at the wrong target. On this issue, we on the governing council fully back the president," Weber said.

A number of top French politicians -- including the two favourites in next year's presidential campaign, Segolene Royal and Nicolas Sarkozy, but also Prime Minister Dominique de Villepin -- have called into question the ECB's role, suggesting that governments should have increased say in the bank's decisions, especially as the euro rises against the dollar.

In the newspaper interview on Friday, Weber said that the French politicians were seeking to scapegoat the ECB.

"The debate in the French presidential election campaign tastes of scapegoating, which we must combat decisively," Weber said.

"I warn against eurozone countries, whose competitiveness is suffering (under the strong euro), to look for external scapegoats," the Bundesbank chief continued.

"The right way is to look inwards, to analyse the shortcomings of their own economic policies and work to correct those political shortcomings," Weber said.

The Bundesbank chief also gave strong hints that further rate rises were on the cards.

"We have made clear that monetary policy is continuing to stimulate the economy and that key rates are still at a low level," Weber said.

"There is no more need (for interest rates) to support the economy. Short and medium-term price risks are pointing upwards. Should the price risks strengthen or become entrenched, then it would certainly be appropriate to adjust monetary policy," the central bank chief said.

The ECB has raised its key rates six times in the past 12 months, each time by a quarter of a percentage point. The last move last week brought the bank's benchmark "refi" refinancing rate to a five-year high of 3.50 percent.

But ECB watchers and the financial markets are divided whether the bank will continue to tighten monetary conditions still further next year, with some observers suggesting that the tightening cycle has already peaked, while others see the refi rising to 4.0 percent by mid-2007.

Pressed by the Frankfurter Allgemeine Zeitung whether rates could rise beyond 3.75 percent, Weber refused to be pinned down.

"I don't want to speculate about concrete monetary policy measures," he said.

"We must be ready to act. In order to anchor inflation expectations at a level compatible with price stability it is necessary to counter inflation risks decisively," Weber said.

Asked whether there was a pain barrier within the ECB with regard to the current strength of the euro, Weber replied: "Pain barriers aren't part of our monetary policy strategy."

With specific regard to the euro-dollar exchange rate -- the euro has risen sharply against the greenback recently and is currently trading at around 1.33 dollars -- Weber said he would not comment further than the recent G7 (Group of Seven) communique.

"In that communique, we said that high volatility and disorderly movements in exchange rates were undesirable. I don't want to say anything beyond that," he said.

The strong euro was also helping to keep a lid on import price inflation, Weber noted.

http://news.yahoo.com/s/afp/20061215/ts_afp/germanyfranceeu_061215101123