MercoPress. South Atlantic News Agency

Inflation fears, but Euro area key rates unchanged

The European Union Central Bank Governing Council left key interest rates unchanged at 2.75% following Thursday's meeting reported the institution's president Jean Claude Trichet.

However since annual inflation rates are projected to remain elevated in 2006 and 2007, with "risks of continuing to be upside" the Governing Council will exercise strong vigilance so as "to ensure that risks to price stability do not materialize" and this could be addressed in early August through a video conference, instead of a full personal meeting of members at the end of that month..

Mr. Trichet said that annual inflation was 2.5% in June 2006, the same rate as in May compared with 2.4% in April, and on average in 2007 inflation rates are likely to remain above 2%, the "precise levels depending on future energy price developments".

Even when the moderate evolution of labour costs in the Euro area is expected to continue in 2007, --reflecting ongoing global competitive pressures--, indirect effects of past oil price increases, and already announced changes in indirect taxes, are expected to exert a "significant upward effect on inflation in the course of next year".

Risks to the outlook for price developments remain on the upside and include "further increases in oil prices, a stronger pass-through of oil price rises into consumer prices than currently expected, additional increases in administered prices and indirect taxes and, more fundamentally, stronger than expected wage and price developments due to second-round effects of past oil price increases".

Mr. Trichet warned of risks to price stability in the housing market saying that on an annual basis, loans to the private sector as a whole have continued to increase at double-digit rates over recent months, with borrowing both by households and by non-financial corporations rising rapidly. "Ongoing strong lending activity to households continues to be explained, in particular, by borrowing for house purchases, which has stood at an annual rate of above 12% in recent months. The dynamic growth of money and credit, in an environment of already ample liquidity, points to increased upside risks to price stability at medium to longer horizons. Monetary developments, therefore, require enhanced monitoring, particularly in the light of strong dynamics in housing markets".

As to economic analysis "the latest data and survey releases remain positive in general and have improved further. Looking further ahead conditions remain in place for continued economic growth at rates around potential, with strong global activity providing support for Euro area exports".

Mr. Trichet said investment is expected to pick up, benefiting from an extended period of very favourable financing conditions, balance sheet restructuring and accumulated and ongoing gains in earnings and business efficiency with consumption growth in the euro area also strengthening gradually over time, in line with developments in real disposable income, as employment conditions improve further.

However the Central Bank is concerned with the need for a rigorous implementation of the revised Stability and Growth Pact with a view to speeding up fiscal consolidation and improving the outlook for fiscal sustainability.

"This needs to be underpinned by medium term-oriented structural reform strategies and appropriate national fiscal institutions and procedures. Reliable compilation and timely reporting of government finance statistics remain essential for the European fiscal framework".

Finally Mr. Trichet referred to the opportunities of globalization, for which "the euro area would greatly benefit from more flexible labour and product markets. It would also gain from a more favourable business environment and a fully fledged internal market ? including in the services sector ? that foster innovation, investment and the creation of new firms".