ECB lowers growth forecast, ups inflation outlook

2nd December 2004, Comments 0 comments

2 December 2004 , FRANKFURT - A soaring euro and high oil prices forced the European Central Bank to announce on Thursday it was scaling back its growth projections and raising its inflation forecast. The increasing economic uncertainties resulted in the bank leaving rates at their post-war low of two percent. But speaking after the meeting of the bank's 18-head rate-setting council, ECB chief Jean-Claude Trichet Trichet warned of the risks posed by high energy costs to growth and consumer prices. He also

2 December 2004

FRANKFURT - A soaring euro and high oil prices forced the European Central Bank to announce on Thursday it was scaling back its growth projections and raising its inflation forecast.

The increasing economic uncertainties resulted in the bank leaving rates at their post-war low of two percent.

But speaking after the meeting of the bank's 18-head rate-setting council, ECB chief Jean-Claude Trichet Trichet warned of the risks posed by high energy costs to growth and consumer prices.

He also emphasised the central role played by fighting inflation in the ECB's charter.

Tackling inflation was "the needle in our compass", the ECB chief told reporters.

Vigilance was "of the essence" in the current circumstances. A rate cut had not been discussed at the governing council's meeting, but other monetary options had been raised.

While acknowledging that economic growth in the eurozone had slipped back a gear since the start of the year, Trichet again insisted that both the currency bloc and the global economies remained on course to growth.

However, instead of a growth range of between 1.8 percent and 2.8 percent, the bank now expects 2005 growth in the 12-member eurozone to come in at between 1.4 percent and 2.4 per cent before again picking up in 2006 to between 1.7 percent and 2.7 percent. This was the first time that the bank has set out its 2006 forecasts.

The result was for the bank to cut its midpoint 2005 growth projection from 2.3 percent to 1.9 percent.

As a reminder of the fragile state of the eurozone's recovery from a prolonged bout of stagnation, data released while the ECB was meeting in Frankfurt showed unemployment in the currency bloc's biggest economy, Germany, edging up from 10.1 percent in October to 10.3 percent in November.

Trichet described the short-term inflation outlook as "worrisome." This is despite oil prices coming off their recent highs and economists saying that they expect the strong euro and the lower growth prospects to help dampen inflationary pressures.

Nevertheless, the ECB now expects inflation to range between 1.5 percent and 2.5 percent next year after 2.1 percent and 2.3 percent this year with Trichet also insisting that the inflation rate will dip below the ECB's two percent target during the course of 2005.

Official data released this week showed eurozone inflation easing to 2.2 percent in November from 2.4 percent in October.

But underscoring the lack of options facing the ECB in arresting the euro escalation, Trichet kept to its previous script that the recent moves in the currency market were "unwelcome".

Despite the alarm caused in the eurozone's business and political establishment by the surging euro, the ECB president also made it clear that commenting on events in forex market was necessarily helpful. "Verbal discipline is really of the essence at this time," he said.

Trichet declined, however, to be drawn on questions whether the ECB would consider teaming up with the Bank of Japan to intervene in the forex market to arrest the dollar's fall by buying greenbacks.

The euro hit a new all-time high of USD 1.3385 while the ECB was deliberating with the greenback's decline against both the common currency and the yen largely being fuelled by market concerns about how the US will finance its so-called twin deficits (the budget and current account deficits).

Despite the US Federal Reserve and the Bank of England having raised rates in recent months, the ECB last changed monetary policy in June last year when it cut its benchmark refinancing rate by a hefty 50 basis points.

For the moment at least, many economists believe the ECB will keep rates on hold well into next year.

 DPA

Subject: German news

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