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ECB urges worldwide inflation battle

(China Daily/Agencies)
Updated: 2008-09-12 15:18

The world's central banks need to make concerted efforts to tackle global inflation and apply monetary policy effectively, European Central Bank Vice-President Lucas Papademos said yesterday.

Speaking at a conference on Europe-China relations in the German port city of Hamburg, Papademos said China needed to make reforms to quell domestic inflation and ensure sustainable growth.

"The world economy is navigating through heavy seas at the moment," he said.

"We all face ... the high inflationary pressure affecting the global economy. To master this challenge, it is essential to use monetary policy in an effective and determined manner."

Papademos' inflation worries were shared by ECB Governing Council member Yves Mersch, who warned in a Luxembourg central bank report that there was still a risk of spiraling wages and prices despite the recent fall in the cost of oil.

Papademos said China's "remarkably strong" economic growth outlook was a bright spot in a world economy that was otherwise largely slowing, but that it was threatened by high domestic inflation that may be spilling over to the rest of the world.

"A key issue is how China will contain potentially significant inflation risks which could undermine the sustainability of its extraordinary growth performance."

"To successfully achieve price stability requires allowing greater exchange rate flexibility," he said.

Germany was an example of a country that had prospered while allowing its currency to rise against the US dollar to control inflation, he added.

China also needed to take more steps to enable monetary policy to function better.

"It would require greater reliance on indirect means of monetary control, notably the use of interest rates and a means to better manage liquidity and influence aggregate demand more effectively, Papademos said.

"To this end, structural changes are necessary to enhance the functioning of the interbank money market."

The People's Bank of China was aware of these needs and working on them, he added.

Papademos was somewhat more downbeat on the euro zone economy than the analysis given by ECB President Jean-Claude Trichet last week after the ECB kept rates unchanged at a seven-year high of 4.25 percent.

"In advanced industrial economies, including the euro area economy, the deceleration of economic growth was more marked and abrupt than previously expected," he said.

"The further weakening of economic activity in most advanced industrial economies is progressively having spill-over effects ... on emerging market economies."

ECB staff forecast last week that euro zone growth would slow to around 1.4 percent this year and 1.2 percent in 2009 from last year's 2.7 percent.

Nonetheless, the ECB's primary focus remained controlling inflation, Papademos said.