By Andreas Scholz and John Fraher
Jan. 27 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said he will ``very, very carefully examine'' figures that yesterday showed money-supply growth in the euro region accelerated to the fastest pace in 17 years.
``It confirms what we have already said and what I have already said in the name of the governing council,'' said Trichet in an interview in Davos, Switzerland, where he is attending the annual meeting of the World Economic Forum.
Trichet has signaled the ECB will raise the benchmark 3.5 percent interest rate in March, which would be the seventh increase since the end of 2005, partly to slow the flow of liquidity. The ECB yesterday said M3 growth, its preferred measure of money supply, surged 9.7 percent in December, more than double the rate it says risks fueling inflation.
ECB council member Lorenzo Bini Smaghi echoed Trichet's concern in a speech he delivered today in Milan. Growth probably exceeded 2.5 percent last year, he said, and would continue to be ``close to or even above its potential'' this year and next.
``The current level of interest rates definitely doesn't constitute a hindrance to growth,'' Bini Smaghi said. The ECB's strategy to increase rates before inflationary pressures mount ``has proven correct, and will continue in coming months.''
The Frankfurt-based central bank defines potential growth, the speed at which the 13-nation economy can grow without fueling inflation, at between 2 percent and 2.5 percent.
`Not Sustainable'
Trichet, elaborating on one of the most popular talking points at this year's meeting, said on a panel today that financial markets are vulnerable to any shock that could hurt the global economy and their risk appetite is ``not necessarily sustainable.''
Investors and policy makers ``have to be prepared for a reappreciation of risk'' which is ``likely,'' said Trichet, sitting next to Chinese deputy central bank governor Wu Xiaoling and Israel central bank governor Stanley Fischer. Such a move may be ``smooth'' or ``disorderly,'' he said.
Trichet cited oil prices, the unraveling of so-called global imbalances and geopolitical conflicts as potential risks to the global economy.
Several measures show perception of risk is near historic lows. The risk of owning European corporate bonds dropped to the lowest ever this week, according to credit-default swap traders. The amount of debt used to finance European buyouts reached a record high in the third quarter.
IMF View
John Lipsky, first deputy managing director at the International Monetary Fund, said the level of risk priced in financial markets is appropriate.
``The global economy turned out much better than expected so it's not surprising that risk measure should be moving in a favorable direction,'' he said in an interview. ``Markets often overshoot and adjust back so that wouldn't be surprise. But the fact that there's something fundamentally wrong is not obvious.''
Trichet said central banks need to ``remain very, very alert'' to the risks of inflation and can't take anything for granted. In an interview yesterday, Bundesbank President Axel Weber said the ECB must continue raising rates to keep a lid on consumer prices.
``We have to take this process of withdrawing monetary stimulation further,'' according to Weber, who also heads Germany's Bundesbank.
Investors expect the ECB to raise its key rate twice more this year, futures markets suggest.
Rate Forecasts
The yield on the three-month Euribor futures contract for March closed at 3.92 percent yesterday. The December contract was at 4.17 percent. The contracts settle to the three-month inter- bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the currency's start in 1999.
Trichet said global growth this year will probably be close to its levels in recent years. The International Monetary Fund says the global economy expanded 5.1 percent in 2006 and 4.9 percent in 2005.
``We have a good probability to have a present year which could be in line with previous years,'' according to Trichet. Still, policy makers, investors and executives should guard against ``complacency'' given the risks facing the global economy, he said.
Growth in the euro region will probably be ``just above'' 2 percent this year, said Trichet, whose bank in December forecast the economy will expand around 2.2 percent this year.
When asked about global currencies, Trichet said he's sticking to the Group of Seven's agreed position and declined to comment further.
To contact the reporters on this story: John Fraher in Davos at jfraher@bloomberg.net
Last Updated: January 27, 2007 08:34 EST
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