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ECB warns of risks posedby surging oil prices

6 May 2004

HELSINKI –The European Central Bank Thursday left interest rates on hold Thursday, insisting that the 12-member eurozone was on track to a moderate recovery but warned of the risk to inflation resulting from the current surge in energy prices.

“While the latest positive signals need to be confirmed by future developments, they underpin the expectation of the gradual recovery in the euro area continuing and strengthening over time,” said ECB chief Jean-Claude Trichet at a press conference following a meeting of the bank’s 12-head rate-setting council in Helsinki.

“The conditions for such a recovery are in place,” declared Trichet.

Trichet went on to say, however, that oil prices are clearly exerting an influence at present on inflation. “It will therefore remain important to pay close attention to inflation expectations,” he said.

However, the ECB chief said that despite the short-term risks currently posed by energy prices, the bank’s governing council was confident that inflation was under control and did not believe that a change in monetary policy was required.

Nor did Trichet believe that rising oil prices were posing any threat to what he described as the robust recovery taking shape in the global economy.

The sharp rise in oil prices has emerged as new dilemma for the ECB with energy prices this week hitting a 13-year high on the back of a cut in output announced last month by OPEC and deepening concerns about violence in the Middle East leading to a disruption of oil supplies.

Signs have already started to emerge of higher oil prices feeding through to eurozone inflation rates with inflation creeping up in the currency bloc to bump up against the ECB’s two percent target in April, according to official data. In March, inflation stood at 1.7 percent.

The ECB regularly holds two meetings a year away from its Frankfurt headquarters with this month’s meeting held in the Finnish capital.

Rates in the eurozone have been on hold since June last year when the ECB delivered a 50 basis points cut in rates.

Most economists believe that the bank’s rate-setting cycle has now drawn to a close and that the ECB will leave its benchmark-refinancing rate at its historic low of two per cent for the rest of the year before starting to tighten monetary policy next year.

But while the ECB was deliberating in Helsinki, the Bank of England meeting in London lifted UK rates by a quarter-point to 4.25 percent in an attempt to wind back inflationary pressures and in the face of escalating economic growth.

In his remarks to reporters, Trichet said that the bank at present did not have any interest rate bias and that its assessment of the current economic and monetary conditions in the eurozone had not changed since the governing council’s last meeting four weeks ago.

He also insisted that the eurozone’s current low interest rate regime was helping to underpin growth in the economy built around the euro.

Analysts expect growth in the eurozone to fall short of two percent this year with exports again emerging as the major pillar of the economy.

Despite a pickup in the euro in recent days, with the common currency having retreated from the record highs of almost USD 1.30 it chalked up in January, the ECB has also been able to resist political pressure for a rate cut to help ensure that the eurozone remains on a growth path. The euro fell in afternoon European trading Thursday to USD1.20.

One of Trichet’s main concerns at his press conference was the negative impact on Europe’s growth potential of the failure of eurozone member states to press on with fiscal and structural changes and to adhere to the strict budget targets as set out in the so-called Growth and Stability Pact.

He said that there were increased reasons to be concerned about current fiscal policies saying that the average eurozone budgetary position was not expected to improve much this year or next and adding that fiscal consolidation efforts might fall short of commitments.

This comes as a fresh political debate emerges in Germany’s about whether to pull back from tough spending cuts in a bid to shore up the fragile recovery underway in the nation and consequently to allow its budget deficit to swell as tax revenue falls and the economy grows at a slow pace.

Trichet did concede that there had been made mixed signals on the eurozone’s growth prospects with a batch of economic indicators and data pointing to high unemployment dampening household spending.

But Trichet told reporters that growth in real disposable income should support private consumption and that over time consumer spending should also be supported by an improvement in labour market conditions.


Subject: German news