ECB warns of inflation risks

9th September 2004, Comments 0 comments

9 September 2004 , FRANKFURT - The European Central Bank warned in its monthly bulletin published Thursday of the inflationary risks posed by higher oil prices but insisted that the 12-member eurozone was on track to a gradual economic recovery. Echoing comments made by ECB chief Jean-Claude Trichet last week at his regular press briefing, the September bulletin said "strong vigilance" was necessary to guard against the threat resulting from this year's surge in energy costs and to help drive eurozone infl

9 September 2004

FRANKFURT - The European Central Bank warned in its monthly bulletin published Thursday of the inflationary risks posed by higher oil prices but insisted that the 12-member eurozone was on track to a gradual economic recovery.

Echoing comments made by ECB chief Jean-Claude Trichet last week at his regular press briefing, the September bulletin said "strong vigilance" was necessary to guard against the threat resulting from this year's surge in energy costs and to help drive eurozone inflation back below the bank's two per cent target.

The release of the ECB's latest bulletin comes as signs emerge of a shift in market sentiment towards the outlook for interest rates in the eurozone.

Up until recently most analysts believed that very moderate economic growth and modest inflation meant that interest rates would remain at their historic low of two percent into 2005.

But Trichet's comments to the press following last week's ECB meeting, warning of inflation risks and painting a confident economic outlook, appear to have changed market expectations with growing numbers of analysts expecting the bank to consider bringing forward a rate hike to later this year. Borrowing costs in the eurozone have been on hold since June last year.

The release of the latest ECB monthly bulletin also comes in the wake of another round of global rate hikes with both the Bank of Canada and the that of New Zealand tightening monetary policy this week.

"While the economic analysis indicates that prospects are consistent with price stability being maintained over the medium term, a number of upside risks need to be carefully monitored," the ECB said in its latest monthly report.

In particular, the ECB is concerned about so-called second round effects from higher oil costs such as unions lodging big wage claims or companies driving up prices as threatening to result in a jump in consumer prices, especially as the economic upswing takes hold.

Last week Trichet told reporters that the ECB will again miss its two percent inflation target before falling during the course of 2005.

Indeed, the monthly report insisted: "Although some upside risks to price stability exist, the overall prospects remain in line with price stability over the medium term."

Despite analysts' worries that the global economy might slow in the run up to the end of the year, ECB bulletin also reflected the ECB expectations that the economic upswing in the eurozone which began to emerge last year was set to continue.

"The information which has become available in recent months indicates that the economic recovery in the euro area has maintained its momentum and should firm in the coming months."

ECB staff projections released last week raised the bank's growth forecasts to between 1.8 percent and 2.8 percent next year and between 1.6 percent and 2.2 percent this year which the ECB said showed the eurozone economy as moving along at close to cruising speed.

The monthly bulletin also restated the ECB's 18-member governing council's concerns about possible changes to the Stability and Growth Pact which sets out tough fiscal rules for euro member states.

While conceding that some alterations might be necessary to help with the pact's implementation, the bulletin said: "The governing council remains convinced that there is no need for changes to the text of the (Maastricht) Treaty and of the Stability and Growth Pact."

DPA

Subject: German news
 

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