ECB keeps options open on oil prices

3rd June 2004, Comments 0 comments

3 June 2004 , FRANKFURT – The European Central Bank held rates at their historic low of two per cent Thursday with ECB chief Jean Claude Trichet saying the bank was keeping its options open as it sized up the risks posed to economic growth and inflation by soaring oil prices.

3 June 2004

FRANKFURT – The European Central Bank held rates at their historic low of two per cent Thursday with ECB chief Jean Claude Trichet saying the bank was keeping its options open as it sized up the risks posed to economic growth and inflation by soaring oil prices.

Indeed, speaking at a press conference following the bank meeting, Trichet acknowledged both the risk to economic growth as a result of surging oil prices and the dilemma facing the bank, warning that it was still too early to say how long the present high level of energy prices would persist.

"The present levels of price oil have both a dampening effect on growth, if they persist, and an upward effect on inflation, which are both highly unwelcome in the present circumstances," said Trichet, who remained confident that the eurozone was course to a moderate recovery.

Twice yearly projections drawn up by the ECB's staff, which were also released by Trichet Thursday, confirmed both the bank's expectations of a steady pickup in growth and the threats posed to inflation.

The ECB staff expects growth to come in at between 1.4 percent and 2 percent this year and between 1.7 percent and 2.7 percent next year. The inflation rate was projected at between 1.9 percent and 2.3 percent in 2004 and 1.1 percent and 2.3 percent in 2005.

In December the bank staff projected a range for growth of between 1.1 to 2.1 percent this year, accelerating to 1.9 to 2.9 percent next year. Inflation was forecast to come in at between 1.3 to 2.3 percent this year, and 1.0 to 2.2 percent for 2005.

But consumer prices in the eurozone jumped to a more than two-year high of 2.5 percent in May on the back of higher energy costs with Trichet saying that the bank joined other international institutions in urging oil producers to ensure that the present spike up in oil prices was transitory and did not become more entrenched.

While Trichet insisted that inflation would fall below the ECB's two per cent target next year, renewed inflationary pressures could limit the bank's scope for delivering more rate cuts if the recovery in the eurozone should stumble.

Moreover, the bank might be even forced to counter renewed inflationary pressures by tightening monetary policy, which could in turn threaten the currency bloc's fragile recovery.

In his comments to reporters, Trichet said that the eurozone economy was still sending out mixed signals adding that the bank's 18-head rate-setting council was keeping its options open and that it currently had no bias towards a tightening or easing of monetary policy.

But market worries about terrorist threats in Saudi Arabia and continuing violence in Iraq are keeping the pressure on energy prices.

Thursday's meeting of the ECB's governing council coincided with a decision by OPEC oil ministers to pump out more oil into the world economy a bid to stabilise oil prices which this week raced past USD 42 a barrel to a 21-year high.

The ECB last changed monetary policy a year ago when it delivered a hefty 50 basis points cut in its benchmark refinancing rate reducing borrowing costs in the eurozone to a post-Second World War low.

And many economists now believe that the ECB will keep rates on hold for the rest of the year as a moderate recovery takes shape in the economy built around the euro.

The prospects for the eurozone remaining on a growth path also appears to be supported by most analysts, who believe that the ECB's next move is likely to be a rate hike possibly at year's end.

Only a matter of weeks ago, however, a number of economists would not rule out that the ECB might be forced to slice back rates in a bid to shore up the eurozone's recovery.

But since then economic data has in general been somewhat encouraging with a number of economists having considered revising their 2004 growth forecasts for the economy built around the euro. Nevertheless, private economists expect eurozone growth to fall short of two per cent this year.

 

DPA

Subject: German news

 

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