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Tough ECB inflation talk backs hike expectations

Daniel Roland/Daniel Roland/Associated Press

European Central Bank policymakers reinforced expectations that they will raise interest rates next month, talking tough on inflation on Friday, a day after the bank shocked markets by flagging an April hike.

Executive Board member Jose Manuel Gonzalez-Paramo said the ECB was ready to raise rates next month if the situation required, sticking to the line unexpectedly presented by the bank's president, Jean-Claude Trichet, a day earlier.

Mr. Trichet's shock announcement on Thursday that an ECB rate rise was possible in April sent further reverberations through financial markets on Friday, with the euro hitting a four-month high against the dollar. Asked whether the central bank was likely to raise rates in April, Mr. Gonzalez-Paramo said: "We will see when the time comes ... It depends on the actualization on our assessment and the information we get in the next 30 days.

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"But clearly the risks to inflation are on the upside and it is the mission of the ECB to prevent those from materializing, so we are ready," he told reporters in Cape Town after speaking at a conference.

Euro zone inflation accelerated to 2.4 per cent last month, moving further above the ECB's target of just below 2 per cent.

A forward-looking indicator released by the Economic Cycle Research Institute on Friday, showed euro zone inflationary pressures hit a 28-month high in January.

Mr. Trichet said on Thursday the ECB would exercise "strong vigilance" over rising inflation, deploying a phrase that in the past signalled a rate rise was only a month away.

The strong indication that a rise will come in April put the ECB in pole position to hike well before the U.S. Federal Reserve and even the Bank of England, which analysts had expected to move first.

The ECB focuses on headline inflation unlike the Fed, which looks more closely at core inflation - a measure that strips out volatile food and energy costs.

In Paris, ECB policymaker Lorenzo Bini Smaghi said strong growth in emerging markets would push up food and commodity prices permanently.

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Policymakers have systematically underestimated inflation and overestimated growth in advanced economies, he added in comments that kept up the ECB's anti-inflation rhetoric and perhaps offered an oblique hint to the Fed.

A firm majority of economists polled by Reuters after Thursday's ECB news conference said the bank will raise rates by a quarter-point next month and do so twice more by the year-end.

"The language at yesterday's press conference signals that, unless some very negative force intervenes, the (ECB Governing) Council will be raising rates in April," Barclays Capital analysts wrote in a research note.

Another ECB policymaker, the Netherlands' Nout Wellink, said the ECB should raise interest rates sooner or later to stem price pressures.

Mr. Wellink told the Dutch central bank's magazine rates could be raised without difficulty when the economy was on a reasonable growth path, adding that he was "a little bit worried" about inflation.

The interview was conducted last month but published on Friday.

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Money markets firmed on expectations of a rate hike in April, with key euro-priced bank-to-bank lending rates jumping on Friday by the most since September 2008.

The three-month Euribor rate - traditionally the main gauge of unsecured interbank euro lending and a mix of interest rate expectations and banks' appetite for lending - jumped to 1.162 per cent from 1.098 per cent.

The rise was the biggest one-day leap since the turmoil caused by the fall of Lehman Brothers in September 2008 and pushed the rate to its highest level in 19 months.

The acceleration in inflation has been driven by a rise in the price of oil. Crude oil rose on Friday, with Brent above $115 (U.S.) a barrel, as fighting in Libya intensified.

"No matter whether the next crisis ahead will be due to increases in the prices of oil and food, to geopolitical markets, we should stand ready to react to any of those possible shocks," said Mr. Gonzalez-Paramo.

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