ECB will hike rates if no year-end slowdown in inflation

The European Central Bank will have to raise interest rates if the rate of inflation does not begin to slow by the end of 2011, ECB Executive Board member Jose Manuel Gonzalez-Paramo said.
"The ECB is confident that the current uptick in inflation is temporary, linked to the price of certain raw materials. We hope it will begin to fall again at the end of the year," Gonzalez-Paramo said in an interview with the ABC newspaper on Sunday.
"But if that doesn't happen we will need to raise rates. We cannot let (inflation) get out of control. The loss of credibility in anchoring inflation has very serious, negative consequences," he said.
The ECB left eurozone interest rates at a record low of 1 percent on Thursday and tempered speculation of a near-term rate hike by saying last month's larger-than-expected inflation jump had not altered its assessment of medium-term price risks.
Gonzalez-Paramo ruled out the risk of stagflation in the eurozone, with the inflation rate running close to 2 percent, but acknowledged that Spain "is a situation apart" as it has to absorb the impact of a decade-long property boom turning sour.
"Spain is looking for a new path. It has to refocus its resources ... More structural reforms are needed," he said. While Spain has embarked on a series of structural reforms, including an overhaul of its labour laws and pension system, the key to the country's recovery is a reform of collective wage bargaining.
"The key objective is the reform of the collective bargaining system. The country's recovery lies there and not to be aware of that is doing the economy no favours," Gonzalez Paramo said. Linking salaries to inflation is outdated and "prevents any adjustment to the labour market," he added.
Spain's government, unions and employers associations signed a broad social pact last week on job creation and industrial development, but left difficult issues such as collective wage bargaining procedures for future talks.
The euro is not at risk, but the market's perception of some governments' lack of commitment to fiscal obligations cannot be ignored, Gonzalez-Paramo said. "It's very important to know what the market is thinking," he said.