--Says ECB Must Remain 'Vigilant' on Upside Risks to Price Stability
--But Sees 'Good Chance' of HICP Falling Below 2% Towards End of 2001
--Says Uncertainty Remains on Development of Euro's Exchange Rate
--But Repeats That ECB Interested in 'Strong' Euro FX

FRANKFURT (MktNews) - The inflationary feed-through from higher oil prices and lingering uncertainty about the euro's exchange rate continue to argue in favor of the European Central Bank's (ECB) wait-and-see stance on monetary policy, Bundesbank President Ernst Welteke, a member of the ECB's Governing Council, said in an interview.
While the risks to price stability in the 12-nation euro area have become "more balanced" in recent months, an all-clear on inflation cannot be signalled yet because the sharp rise in oil prices seen last year is still being felt, Welteke told German financial weekly Boerse Online in an interview to be published Thursday.
The interview was conducted on March 6.
"Also with regard to the (euro's) exchange rate we can't say with absolute certainty where the road will lead," he said.
"Therefore, we would do well to remain on hold" with regard to European interest rate policy, Welteke said, adding that the ECB must remain "vigilant" with respect to inflationary pressures in Europe.
On the euro, Welteke said that while the ECB does not target the currency's exchange rate, "every European central banker is interested in a strong euro exchange rate," as this makes it easier to deliver domestic price stability.
Welteke cautioned in that regard that higher import prices were still feeding through to eurozone consumer prices as a result of the euro's exaggerated weakness last year.
"Here, too, it is still too soon to sound an all-clear," he said.
Still, Welteke said he was "currently less concerned" about eurozone inflationary developments than about some of the domestic issues confronting the Bundesbank, such as a planned institutional reform of the German central bank and the future institutional responsibility for financial market supervision in Europe's largest national economy.
"There's a good chance that we will see the (harmonized eurozone) consumer price index fall below 2% towards the end of the year," he said.
Asked about Ireland's high rate of consumer inflation, Welteke admitted that Europe's current legal framework in the form of the Growth and Stability Pact gives little if any leverage to force the government of the small country to tighten its fiscal policies. He noted that the Pact contains no provision to deal with a situation in which a country has both high inflation rates and a budgetary surplus.
The most that can be done in the current situation is for Ireland's partner countries to issue a policy recommendation, which was in fact done recently by the European Commission, said Welteke.
"Of course, the question is whether such recommendations are followed," he said.
"But it is already a great improvement that we are now discussing Ireland's budget," Welteke continued. "That would not have interested anyone in Europe just a few years ago."
In other comments, Welteke said the ECB was "especially vigilant" with regard to proposals to strengthen the role of the Eurogroup of 12 eurozone finance ministers, particularly if such steps went beyond a strengthening of economic and fiscal policy coordination and posed a threat to the ECB's institutional independence. -