UPDATE:ECB Bini Smaghi:May Need Rate Hikes Before Econ Peaks

UPDATE:ECB Bini Smaghi:May Need Rate Hikes Before Econ Peaks
   (Adds remarks.)     By Roman Kessler    Of DOW JONES NEWSWIRES  

FREIBURG, Germany -(Dow Jones)- The European Central Bank may have to increase interest rates well before the economic cycle reaches its peak, a high-ranking ECB policy maker said Wednesday.

"It's essential to include monetary and financial variables in the information available to central banks," ECB executive board member Lorenzo Bini Smaghi said, speaking to students in Freiburg, Germany.

"They can provide the signal that the monetary policy stance needs to be tighter well before the business cycle reaches its peak, in order to ensure price stability over the medium term," he added.

The ECB aims at annual inflation rates of just below 2% over the medium term, or 18-24 months. Economic developments are secondary in its policy mandate that states that fostering economic growth and employment must not prejudice reaching price stability.

The ECB has been criticized for applying too narrow a focus to its policy and easing its policy stance too late to mitigate the impact of the financial and economic crisis on the 16-nation euro zone. Meanwhile, the U.S. Federal Reserve, cutting rates already well ahead of the collapse of Lehman Brothers last September, addresses both economic and price trends.

Bini Smaghi said he is responding to a debate about the focus of monetary policy.

"Monetary policy which is appropriate for price stability might not suffice to ensure financial stability," Bini Smaghi said. "Evidently, ... instruments [other than monetary policy] are needed and they belong more to the realm of macro-prudential supervision."

The ECB is advancing plans to build strong institutional oversight at a European Union level, with the ECB playing a key role.

"Unless central banks are explicitly equipped with the appropriate macro-prudential supervisory instruments, they cannot be considered responsible for financial stability," Bini Smaghi said, adding that interest rates are only one tool, but the central banks need to tackle more than one challenge.

At the same time, "a hesitant and belated removal of policy accommodation," may contribute to a rise in renewed financial imbalances, he said.

Commenting on economic developments, Bini Smaghi said monetary policy after financial crisis is sometimes less effective to help economic recovery.

"Monetary policy does not have a consistent effect on the duration of recession," Bini Smaghi said, citing from research.

The ECB left its interest rates unchanged at 1% at its rate meeting in Venice last week.

Both ECB President Jean-Claude Trichet and Bank of Italy Governor Mario Draghi called upon banks to contribute to the economic recovery. Trichet said the ECB is doing its share to overcome credit supply constraints and encouraged banks to do what is needed to help companies get financing.

    ECB Web site: www.ecb.int  

-By Roman Kessler, Dow Jones Newswires; +4969 2972 5514; roman.kessler@dowjones.com

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(END) Dow Jones Newswires

October 14, 2009 11:42 ET (15:42 GMT)

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