DRO, Italy, Aug 26: The European Central Bank must act at once if there are any signs of inflationary pressures in order to maintain credibility with markets, Executive Board member Lorenzo Bini Smaghi said on Saturday.

The European Central Bank last raised rates by a quarter percentage point to three per cent on August 3, its fourth increase since December 2005.

Bini Smaghi, speaking at a conference, said oil prices were likely to remain high, given likely increases in demand from countries such as India and China which are seeing strong economic growth.

Bini Smaghi also said conditions were currently good in Europe, and in particular in Italy, for a strong fiscal adjustment.

In order to avoid problems in public finances, he said, European countries needed to alter fiscal policy, and France and Germany as well as Italy could otherwise face difficulties.

“In many European countries there needs to be a clear change in fiscal policy to avoid a crisis in the sustainability of public debt,” he said.

He said low employment was the most pressing problem for Europe, adding this was helping keep living standards behind the United States.

“Europe is growing more slowly (than the US) because productivity is increasing very little and few people are working, especially in the age range between 50 and 55 years,” he said.

Bini Smaghi, Italy's representative on the ECB executive board, said the country needed to tackle debt and spending.

“In the case of Italy, reduction of debt and public spending are absolute priorities, more than in other countries because of the high level of debt,” he said.

Italy's government sees the debt-to-GDP ratio falling from 107.7 per cent this year to 107.5pc in 2007 and 105.1pc in 2009. GDP growth is forecast to be 1.5pc this year after no growth last year but Italy still lags the eurozone rate of just above 2pc.

Italy has vowed to bring its debt below 3pc of GDP in 2007 from a projected 4pc this year.

—Reuters