Generational change expected at ECB

TALLINN - The European Central Bank may step up its inflation fight as up to a third of its Governing Council is to be replaced this year, reports Bloomberg. An unprecedented seven seats on the ECB’s 23-member council may change hands in a year marked by the retirement of President Jean-Claude Trichet. The new generation of central bankers, under the likely leadership of Italy’s Mario Draghi, will reinforce the ECB’s inflation-fighting resolve, say economists at Citigroup Inc. and Societe Generale.

“In the short-term, the ECB may turn more hawkish,” said Klaus Baader, co-chief euro-area economist at Societe Generale in London. “Draghi will want to show he’s not lax about inflation risks and the new members will keep their voices down, strengthening the influence of established hawks like chief economist Juergen Stark.”
Germany, the only one of the four biggest euro countries yet to endorse Draghi, got a new Bundesbank president on May 2. Jens Weidmann signaled he’ll follow in Axel Weber’s inflation-fighting footsteps on the ECB council, saying price stability must remain the bank’s primary goal. He and Luc Coene, the new Belgian central bank governor, may support further ECB rate increases to curb mounting inflation pressures.

“Weidmann won’t rank behind Weber in terms of hawkishness,” said Juergen Michels, chief eurozone economist at Citigroup in London. “It also doesn’t seem that the successors of outgoing council members will be less focused on inflation fighting.”
ECB policy makers, who raised the benchmark rate by a quarter point to 1.25 percent last month, next convene on May 5 in Helsinki. Some economists expect them to signal that another move will come as soon as June.
Monetary policy is “still too accommodative,” Belgium’s Coene said in an interview on April 18, striking a tougher tone than his predecessor Guy Quaden, who on March 31 endorsed a “cautious” rate increase.

Draghi has also sharpened his language. While Trichet said last month’s rate step wasn’t necessarily the start of a series, Draghi signaled more to come. “Monetary policy must take into account the emergence of inflationary tensions, pushed by rising food and energy prices,” he said on April 13.

Most economists and investors predict two more quarter- point increases in the ECB’s benchmark rate this year, taking it to 1.75 percent.
“We believe the ECB has to raise interest rates higher than markets expect,” Andrew Bosomworth, a fund manager at Pacific Investment Management Co., wrote in a guest commentary for Germany’s Boersen-Zeitung on April 28. “The ECB’s benchmark rate is still too low in light of economic growth and inflation expectations.”

Inflation, which the ECB aims to keep just below 2 percent, accelerated to 2.8 percent last month. Incoming policy makers will have to weigh that against the risk of inflaming the sovereign debt crisis that’s afflicting peripheral nations such as Ireland, Greece and Portugal.

As the representative of Europe’s largest economy, Weidmann will be central to those deliberations. He helped steer Germany through the financial crisis as Chancellor Angela Merkel’s chief economic advisor from 2006.
One of the ECB’s key challenges is to “formulate a return to monetary policy normality,” Weidmann said in his first speech in Frankfurt on May 2 after taking the Bundesbank’s helm.

Next month, Belgium’s Peter Praet will replace Gertrude Tumpel-Gugerell on the ECB’s Executive Board, whose six members together with the central bankers of the 17 euro nations comprise the Governing Council.

In July, Malta’s central bank governor Michael Bonello will be replaced by Josef Bonnici, and Nout Wellink will step down as head of the Dutch central bank. Lex Hoogduin, 54, has been tipped by academics and bank officials as his likely replacement.
The selection of Draghi to succeed Trichet, whose term ends on Oct. 31, may force two further changes.  Italy would need to appoint a new governor to join the ECB’s council in Draghi’s stead, and Lorenzo Bini Smaghi would probably have to make way for a new French policy maker on the six-member board to avoid Italy dominating the ECB’s top decision-making body.
European leaders will decide on a successor for Trichet in June, Merkel’s spokesman Steffen Seibert said last week. French President Nicholas Sarkozy, Italy’s Prime Minister Silvio Berlusconi and Spanish Finance Minister Elena Salgado have expressed support, with Belgium, Luxembourg and Portugal also backing the Italian’s candidacy.

Estonia’s adoption of the euro on Jan. 1 saw Andres Lipstok join the ECB council this year, bringing the potential number of new faces to eight. Bonello said in an April 15 interview that, while changes on the Governing Council may shuffle the deck chairs, all policy makers will keep the ECB’s primary mandate in mind. “I am sure that the new members will share a similar commitment to the ECB’s mission as the departing members,” he said. “It might change the distribution of views, but at the end of the day all members will be fully committed to what we have to do, and that’s to pursue the single mandate that we have, price stability.”