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Ordonez May Resist ECB Rate Rise on Concern Over Spanish Growth

Aug. 2 (Bloomberg) -- Bank of Spain Governor Miguel Angel Fernandez Ordonez, who joins the European Central Bank's governing council tomorrow, may be out of step with policy makers' march toward higher interest rates.

Ordonez, 61, is a former deputy of Economy Minister Pedro Solbes, who on July 28 cited higher rates as one of the biggest threats to the Spanish economy. Ordonez said in 2004 that costlier loans might derail his country's economic expansion, which is poised to outpace the European Union for a 12th year in 2006 as low borrowing costs fuel spending.

``He'll be in favor of not raising interest rates,'' said Javier Morillas, professor of international economics at San Pablo Ceu University in Madrid. ``Solbes has walked through fire for him.''

Solbes was attacked by opposition politicians after naming Ordonez, who is also a member of the governing Socialist Party, because candidates traditionally have less partisan backgrounds. He was nominated on June 28, three weeks after the ECB raised its benchmark interest rate to 2.75 percent, the third increase since the start of December.

ECB President Jean-Claude Trichet signaled July 6 the central bank is ready to step up the pace of rate increases as growth accelerates and record oil prices fuel inflation. All 46 economists surveyed by Bloomberg News predicted an ECB rate increase tomorrow.

Not a `Hawk'

Ordonez's publicly stated views appear more in line with council members Vitor Constancio, the governor of the Bank of Portugal, and Lorenzo Bini Smaghi, a former director general of Italy's Treasury, who have said the bank must avoid choking growth in its bid to control inflation. The Bank of Spain chief praised the council at the end of 2003 for holding rates at a six-decade low of 2 percent even as growth accelerated.

``Ordonez is not going to be a hawk,'' said Jose Carlos Diez, chief economist at Intermoney SA in Madrid. ``He will never do anything that undermines the Socialist Party or the government.''

Ordonez spent much of the last 25 years working within the Spanish government. He served three times as deputy finance minister, taking responsibility for the economy, trade and most recently the budget under Solbes. He helped Spain in 2005 to its first budget surplus since the country returned to democracy in 1978.

Ordonez said in a column in Cinco Dias in early 2004 that Spain's economy would suffer when the ECB raised rates. The nation's growth is dependent on consumer spending and the booming housing market, giving Spain the highest inflation rate in the euro region and cutting the competitiveness of the country's businesses.

`Don't Ask'

``Don't ask what will happen in Spain when interest rates are higher,'' Ordonez wrote. ``When Europe recovers and rates rise, we'll regret not having addressed the imbalances'' in the economy.

Growth has been surging in Spain as record low interest rates fueled a building boom that helped cut the unemployment rate by more than half in a decade to 8.5 percent.

The Spanish government said on July 28 it expects the economy, Europe's fifth-biggest, to continue to outpace the euro region, expanding 3.4 percent this year and 3.2 percent next.

The ECB says economic growth in the euro region will slow to about 1.8 percent next year from 2.1 percent in 2006. By comparison, the U.S. economy will expand 3.2 percent this year and Japan may grow 2.8 percent, the European Commission said on May 8.

Ordonez's chief adviser at the Bank of Spain, Jose Luis Malo de Molina, who will be accompanying him at the ECB rate-setting meeting in Frankfurt, says higher rates are needed.

`Poles Apart'

Higher rates ``will ease the risks the Spanish economy faces,'' Malo de Molina, director of economic research at the bank said in a March 3 interview. Malo de Molina said Spain needs rates at 4.5 percent.

``The views of Ordonez and Malo de Molina are poles apart,'' Diez said.

Spanish executives may side with Ordonez. One-fifth of executives say the economy will start to suffer when rates reach 3 percent and almost two-thirds expect serious consequences should the ECB go as high as 4 percent, according to a survey by polling company Metroscopia published in Cinco Dias.

While Ordonez and Malo de Molina differ on their prescription, they agree Spain's reliance on domestic demand has created imbalances in the economy that could hurt growth if higher rates weigh on consumer spending.

Ordonez would not be the first to change his views on arrival in Frankfurt. Axel Weber, Bundesbank president, abandoned his call for the ECB to scale back the emphasis on monetary analysis after he joined the governing council.

``These guys go native before you know it,'' said Klaus Baader, chief European economist at Merrill Lynch & Co. in London.



To contact the reporter on this story:
Ben Sills in Madrid at bsills@bloomberg.net.
Last Updated: August 1, 2006 19:13 EDT
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