The European Central Bank will raise rates if the increase in inflation is not temporary and fuels second-round effects, Governing Council member Yves Mersch said. “At the beginning of March you’ll have our first forecast in 2011 and if it’s true that what we see at the moment is only a temporary increase with a retreat at the end of the year below 2 percent, there’s no danger,” Mersch said in Luxembourg late yesterday. “However, there would have to be a rigorous intervention by the monetary authorities if across the second- round effects there’s the risk that this increase transforms into a plateau.” ECB President Jean-Claude Trichet last week signaled no immediate plans to raise interest rates even though the bank expects inflation to stay above its 2 percent limit for longer than it predicted just three weeks earlier. Annual price gains in the euro area have accelerated to 2.4 percent, the fastest in more than two years and the central bank will publish new economic and inflation forecasts at its next policy setting meeting next month. While inflation pressures have “undoubtedly increased,” they “are of a nature that is typically outside the influence of the central bank because their origin is external,” such as energy and commodity prices, Mersch said. Egypt Tensions Political tensions in Egypt are stoking oil prices, and in Germany, where the economy is booming and import-price inflation is running at the fastest pace in 29 years, workers are demanding bigger pay increases. “From the moment that we would see manifestations of second-round effects, it’s clear that we would have to intervene,” Mersch said. The ECB last week kept the benchmark lending rates at 1 percent for a 22nd month. Economists expect the ECB to raise rates in the fourth quarter, before the Federal Reserve, which is forecast to raise rates in the first quarter of 2012, according to Bloomberg surveys. The ECB last raised interest rates in July 2008, just as the global financial crisis was brewing, in a warning to unions and households not to seek recompense for faster inflation. German chemical workers are seeking up to 7 percent more pay, and the country’s IG Metall union has asked for a 6 percent increase for workers at companies including Volkswagen AG. Mersch said the central bank could lift borrowing costs “without having exited” its crisis measures which include providing banks with unlimited liquidity against eligible collateral and buying government bonds. To contact the reporters on this story: Gabi Thesing in London at gthesing@bloomberg.net; Stephanie Bodoni in Brussels at sbodoni@bloomberg.net To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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