MercoPress. South Atlantic News Agency

Euro rates unchanged but inflation warning still on

The European Central Bank decided Thursday to keep Eurozone interest rates unchanged at 3.25%, as markets were expecting. However analysts believe the ECB will up rates by 0.25% in December to keep close track of inflation and once data on the performance of the German economy is available.

Jean Claude Trichet, ECB president said that "strong vigilance remains the essence so as to ensure that medium to longer-term inflation expectations in the euro area remain solidly anchored at levels consistent with price stability".

"With the key ECB interest rates at still low levels, money and credit growth dynamic, and liquidity ample by all plausible measures, our monetary policy continues to be accommodative", pointed out Mr. Trichet insisting that "if our assumptions and baseline scenario continue to be confirmed, it will remain warranted to further withdraw monetary accommodation".

Despite October's inflation fall to 1.6%, the ECB is concerned that lower oil costs could refuel upward price pressures as well as soaring German and French business and consumer confidence.

The ECB which last raised rates last month - by one-quarter of a percentage point - has set an inflation target of 2% or below.

"Acting in a firm and timely manner remains essential to ensuring price stability over the medium term. This is a prerequisite for monetary policy to make an ongoing contribution towards supporting sustainable economic growth and job creation in the euro area", said Mr. Trichet following the official announcement.

Describing the performance of the Euro zone economy Mr. Trichet said that economic activity has been growing at an average quarter-on-quarter rate of 0.7% over the four quarters to mid-2006, and thus faster than generally expected a year ago.

"The momentum of the economic expansion is expected to have continued in the second half of this year. In addition, the unemployment rate has been declining, employment growth has recovered and employment expectations remain favorable".

Looking further ahead, "conditions remain in place for the euro area economy to grow at solid rates around potential, although some volatility in the quarterly growth rates is likely to emerge around the turn of the year, mainly reflecting the impact of an increase in indirect taxes in a large euro area country in January 2007".

"Consumption growth in the euro area should also strengthen further over time, in line with developments in real disposable income, as employment conditions continue to improve".

Regarding risks they are broadly balanced over the shorter term, taking into account, in particular, the recent slowing down in the US economy on the one hand and the recent fall in oil prices on the other. "The oil price decline ? if it were to prove lasting ? has the potential to lead to somewhat stronger demand and output growth than embodied in our current baseline scenario for activity in the coming quarters".

Over the longer term risks to growth continue to lie on the downside, relating mainly to the possibility of a renewed increase in oil prices, fears of a rise in protectionist pressures, especially after the suspension of the Doha round of trade talks, and possible disorderly developments owing to global imbalances, highlights the ECB president.

He described the recent decline in inflation as the combined result of favorable base effects, in particular the strong rise in oil prices a year ago, and the recent significant fall in oil prices.

"While the outlook for energy prices remains uncertain, on the basis of current energy prices and the higher quotations on futures markets, inflation rates are likely to increase again in the next few months and early 2007".

Consequently "we expect a high degree of short-term volatility in the annual inflation rate. Looking through this volatility, however, inflation will remain elevated at a level above 2% on average in 2006 and is likely to remain so in 2007".