ECB remains worried about oil prices

Thursday, June 02, 2005

The European Central Bank (ECB) sees underlying inflationary expectations contained in the medium term. ECB president Jean-Claude Trichet said on Thursday after the meeting of the ECB's governing council, that inflation in the Euro zone fell to 2.0 percent in May from 2.1 percent a month earlier, but the ECB would have to remain vigilant because of high oil prices. In the light of global imbalances (reported here) the ECB prefers to stay put, because a change in ECB rates, whichever way, could lead to higher market rates. "In any case, when I compare our own bond rates to others I see that they are at a low level. I don't want to create a hit parade of inflation expectations," Trichet said. But he warned that this may not last forever.
"Most recent indicators remain balanced on the downside", he said in a webcasted press conference and added, "looking ahead we assume adverse effects will diminish," as the global growth outlook continues to support exports and consumption growth is expected to develop in line with real income growth. Regarding interest rates, which were left unchanged for the 26th month in a row, Trichet said, "I can fully confirm that after thorough discussions we were unanimous that rates are at an appropriate level for price stability and that they are reassuring households that their purchasing power will be protected." Questions on the rate outlook he answered with the advice, that intentions to consume or invest should be realized now, citing, as a month earlier, that the present yield curve is exceptionally favourable to stimulate growth.
"All in all our judgment remains that the economy will gradually improve. Recent data, global imbalances and oil prices may project lower growth (though)," he said, "taking into account upside risks to inflation prevailing from oil prices and administered prices." The accumulated stock of money supply M3 may entail upside risks to inflation while the development in fiscal policies in the Euro area were giving reasons for concern too. "The revised rules of the stability pact need to be employed soon," Trichet said further, balancing between a better growth outlook for 2006 and immediate dangers to price stability.
According to the most recent ECB staff projections real GDP growth in the Euro zone is seen between 1.1 and 1.7 percent this year and between 1.5 and 2.5 percent in 2006, reflecting an overhaul of the Dutch health care system next year.
Trichet cautioned wage negotiators on both sides of the table to keep up "continued responsibility... as this is very important." Important for both sides, as "consumption growth is expected to develop in line with real income growth," he said.
Regarding the global outlook, Trichet said that nations on both sides of the Atlantic have to do their homework, alluding to the triple deficits in the US and the slow growth outlook in Europe. The recent weakening of the Euro might benefit exports from the Euro zone, the Prudent Investor notes.
Rumours about dissolution of Euro area "totally absurd"
Trichet did not want to comment on rumours about a possible dissolution of the Euro zone (see this post) after the rejection of the EU constitution in France and the Netherlands (reported here and here). "I don't comment on absurd questions. This is complete nonsense,...totally absurd," he said. In regard of the rejection of the constitution he added that this had only reaffirmed the ECB's devotion to deliver a stable monetary policy that can be trusted. But "it is clear that as far as reforms are concerned we all have to explain and convince people that everybody would be better off with a reform. Where reforms have been employed there is no mass unemployment."
The ECB decided that the minimum bid rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 2.0, 3.0 and one percent respectively.
The Euro moved lower after the press conference to 1.2240 dollars, but recovered to 1.2275. Before the ECB meeting it had settled in a tight range around 1.2265 dollars. "It is not customary to comment on exchange rates on a day to day base for the ECB...this is the normal functioning of the markets," said Trichet after the Euro had moved lower 4 cents in 4 days.

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