European Central Bank must focus on containing inflation - councillor

Seville: The European Central Bank must continue to focus on keeping inflation at very moderate levels, Governing Council member Miguel Angel Fernandez Ordonez said on Thursday.

Euro zone inflation eased in August to 3.8 per cent year-on-year from a 4.0 per cent peak but remains well above the ECB's 2 per cent ceiling, and policymakers have said they see no room for an interest rate cut from 4.25 per cent.

"It is essential that the ECB dedicates itself totally to its objective of maintaining inflation at very moderate levels," said Ordonez, who is also governor of the Bank of Spain, at an economic seminar in Seville.

Confident

"There is full confidence that the ECB will steer inflation to its goal, which is helping to mitigate somewhat uncertainty," Ordonez said. "It would have been very negative if the ECB had succumbed to the temptation of forgetting its objective of containing inflation."

It is difficult to tell whether financing conditions in world markets will tighten further, Ordonez said, although markets expect interest rates to remain at relatively moderate levels.

Ordonez said the prolongation of the world financial crisis will cause a more severe slowdown in Spain. Banks were in a "particularly solid situation" but had to reinforce risk controls due to rising bad debt levels.

"The real estate correction, and, in general, the economic slowdown is already showing up in the rise in bad debts, although that was expected and it is still at far from alarming levels," he said. He also warned against government policies aimed at stopping the slowdown, such as state bailouts to firms.

"It's essential governments and legislators avoid the temptation, not only for the budgetary impact, but because its essential economic agents adapt to new realities, as painful as they may be," Ordonez said.