ECB's Mersch Urges Caution as Growth Risks Increase (Update1) By Simone Meier and Stephanie Bodoni Enlarge Image/Details Jan. 16 (Bloomberg) -- European Central Bank council member Yves Mersch said the bank should exercise caution as risks to economic growth increase. ``We have certainly downside risks to economic activity,'' Mersch, 58, said in an interview at his office in Luxembourg yesterday. While inflation risks have also risen, ``we're not unaware of mitigation to price developments,'' he said, citing a stronger euro, near-record oil prices, the slowing U.S. economy and higher credit costs. The ECB has threatened to raise interest rates as unions demand wage increases to compensate for the fastest inflation in six years. At the same time, the U.S. Federal Reserve is cutting borrowing costs to stave off recession in the world's largest economy after its housing market slumped. ``I don't like assumptions that what's happening in one part of the world is also true for another part,'' Mersch said. The ECB should nevertheless ``be cautious, look at the figures and take the appropriate decisions. There's still widespread uncertainty, and that's affecting confidence.'' The euro fell more than a cent on the comments, to $1.4652 at 5.06 p.m. in Frankfurt, and bonds rallied. Mersch is the fifth policy maker this week to note either downside risks to the economic outlook or the temporary nature of the jump in inflation. `Look Through' The ECB can afford to ignore an oil-driven surge in inflation if it doesn't inflate wage settlements, Mersch said. ``If there's no pass-through of these temporary factors to the general price level, we're able to look through if need be.'' Inflation, which held at 3.1 percent in December, may return to the ECB's 2 percent limit next year if oil prices ease and wages don't rise excessively, ECB council members Michael Bonello, Lorenzo Bini Smaghi and Axel Weber all said this week. Mersch said while rising oil and food costs have increased the likelihood of so-called second-round effects materializing, they ``haven't materialized so far.'' Financial-market uncertainty and ``other international developments'' may ``weigh on the inflation development,'' he said. The ECB shelved a planned rate increase in September and has since kept its benchmark at 4 percent to assess the economic impact of the U.S. subprime mortgage collapse, which made banks reluctant to lend and drove up the cost of credit globally. Oil prices near $100 a barrel and the euro's appreciation may also damp European growth. Downward Revision ``There will be a moderation of growth inside Europe,'' Mersch said, adding he can't rule out the bank's 2 percent forecast being revised down in March. The economy should expand this year at close to ``but below'' its potential rate of about 2 percent. Even so, ``we have sound economic fundamentals,'' Mersch said. ``What we see is that the European consumer is less leveraged than the U.S. consumer. The structures of the economy are quite different.'' The Fed has cut rates three times since September and Chairman Ben S. Bernanke said last week that more reductions ``may well be necessary'' to counter ``downside risks'' to growth. By contrast, ECB President Jean-Claude Trichet said Jan. 10 the bank has a bias to raise rates and will act ``preemptively'' if it sees signs of a wage-price spiral developing. Asked if the ECB will act, Mersch said: ``If needed. But we will keep all flexibility in order to assess whether there is a need at each meeting of the governing council.'' The bank has ``not taken a decision'' to raise rates yet, he said.
Am loving it. Made a killing on EUR/USD and the AUD and GBP crosses. The market has been ignoring this for so long, it's the day of reckoning.
Gotta feeling the same thing will be happening for the USD/JPY. Carry trade shall be back in action very very soon.