Financial thoughts

European Central Bank council member Mario Draghi said last week's “timely'' interest rate increase is already easing investors' inflation concerns, suggesting he sees no immediate need for a further move.

“In the days following the increase, the tendency of inflation expectations to increase in the financial markets has peaked and seems to be decreasing,'' Draghi said in a speech in Rome today. “A timely monetary adjustment reduces the risk of late and violent corrections.''

Investors' inflation expectations have dropped since the ECB last week increased its benchmark rate by a quarter point to 4.25 percent. At the same time, ECB President Jean-Claude Trichet today reiterated that inflation at the fastest pace in 16 years is “worrying'' and Executive Board member Jose Manuel Gonzalez- Paramo said the Frankfurt-based bank is ready to take any further necessary steps to get inflation under control.

The breakeven rate on five-year French inflation-indexed bonds, which measures price expectations, was at 2.49 percent today. That's down from a record 2.76 percent on July 2, the day before the ECB raised its benchmark rate.

Crude oil has more than doubled in the past year and inflation in the 15 euro nations accelerated to 4 percent in June, twice the ECB's 2 percent target.

`Timely Fashion'

“By acting in a timely fashion, we intend to try to avert the risk that increases'' in energy and food prices triggers second-round effects, Draghi said. The aim is to “gradually bring down inflation to levels coherent with medium-term price stability.''

Maize prices have almost tripled since the beginning of 2006, prices of soybeans have more than doubled and wheat prices have risen by more than 80%, the ECB said in its June monthly report faxless payday loans.

Central banks “have the duty to avoid risks to price stability from materializing. So they must, we must, act firmly,'' ECB governing council member Miguel Angel Fernandez Ordonez said in Madrid today. The increase in commodity prices may “be a leading indicator of stronger, more generalized inflation pressures at a global level.''

The ECB is worried that companies will raise prices to pass on soaring raw-material costs and unions will push through bigger wage deals to compensate workers for the increased cost of living, leading to more persistent inflation.

`Strongly Concerned'

Trichet said in the European Parliament in Strasbourg today that the ECB is “strongly concerned'' about so-called second- round effects. European labor costs rose 3.3 percent in the first quarter from year earlier, the most in almost five years.

Deutsche Lufthansa AG, Europe's second-biggest airline, canceled about one-third of its flights yesterday after pilots at its Cityline carrier went on strike, marking the most disruptive stoppage in seven years. Vereinigung Cockpit union said in May that Cityline pilots wanted a “double-digit'' percentage pay raise.

Investors expect the ECB to lift the key rate once again by the end of March next year, taking it to 4.5 percent, according to Eonia forward contracts.

Speaking in Madrid, Gonzalez-Paramo said the ECB currently has “no bias,'' which he said means the bank “will do what is necessary at every moment grounded in data and figures to ensure we permanently fulfil our mandate.''

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