The European Central Bank is facing growing pressure from employers and euro zone finance ministers to hold back on raising interest rates in its efforts to keep inflation in check.
Euro zone finance ministers issued a frank warning to ECB president Jean-Claude Trichet at a meeting yesterday that it was too early to take interest rate action to tackle a recent spurt inflation, caused almost exclusively by soaring oil prices.
Luxembourg Finance Minister Jean-Claude Juncker, who chaired the meeting, urged the ECB 'not to take an inconsiderate monetary policy decision' because high oil prices had so far not fuelled second-round effects on other prices.
Analysts and policymakers have been looking for signs lately that surging oil costs will have a knock-on effect on other prices and wages, causing a spurt in inflation.
The European Union's Eurostat statistics office estimates that euro zone inflation eased in October to 2.5% from 2.6% in September, when oil prices peaked in the wake of hurricane Katrina in the US. But that is still well above the ECB's preferred inflation rate of close to but less than 2%.
In reaction, the ECB has said on numerous occasions recently that it stands ready to raise interest rates if high oil prices feed into other prices.
Most recently ECB governing council member and Bank of Greece governor Nicholas Garganas said that the ECB would act promptly if it saw any signs of inflation risks materialising.
After the ECB left interest rates on hold last Thursday, ECB president Jean-Claude Trichet said the bank remained highly vigilant on inflation and stands ready to raise interest rates.
Concerned that a rate rise could sap the growing strength of an economic recovery underway in the euro zone, finance ministers were eager to convince Trichet that high oil prices had not provoked 'second-round effects' and pointed out that 'wage moderation has been seen in all countries in the zone', Juncker said.
