FRANKFURT (AFX) - The European Central Bank said inflation risks need to be monitored closely in light of continued high oil prices
"Upside risks (to inflation) over the medium term need to be monitored closely. Concerns relate, in particular, to the continued high level of oil prices," the ECB said in its August monthly bulletin
The ECB said its governing council last week confirmed its assessment that stronger inflation pressures are likely to persist in the short term, but that the medium-term outlook for inflation is still in line with its price stability goal
The ECB aims to keep euro zone inflation below but close to 2 pct over the medium term. Inflation is currently running at 2.4 pct
The council left interest rates unchanged at its Aug 5 meeting
The central bank said that in addition to the threat from oil prices, possible rises in indirect taxes and regulated prices also represent an upside inflation risk, although it is difficult to assess the impact of this at this stage
These short-term concerns over oil prices and indirect taxes create a risk of "second round" inflation effects if wages and other prices are raised in reaction to these temporary inflation pressures, it said. Vigilance is required regarding market inflation expectations, it added
The ECB said that if oil prices stay high for some time, inflation is likely to remain above 2 pct for the remainder of the year and in the first few months of 2005
But it said inflation should drop back below 2 pct in the course of next year as the strong upward shocks to prices seen in 2004 drop out of the year-on-year calculation. Rises in oil prices, indirect taxes and regulated prices have all pushed inflation higher this year
"Looking further ahead, there are no indications as yet of a build-up of stronger general inflationary pressures," it said
Domestic price increases should remain contained providing that wages continue to develop moderately, it said. The latest evidence suggests that wage growth is remaining moderate, it said
The ECB said data released over the past month confirm that the euro zone economic recovery is continuing
"The latest indicators of output and demand remain consistent with ongoing growth in real economic activity," it said
High oil prices could dampen the euro zone's growth dynamics, but for the moment activity remains well supported by robust growth in the global economy, it said
The ECB said it therefore remains confident that the euro zone will continue to recover
Euro zone investment should increase as a result of strong global demand, growing business confidence and favourable financing conditions
Private consumption should benefit from increases in real disposable income and stronger employment growth
The ECB said the moderation in M3 money supply growth seen since last summer has been more modest than might have been expected
While investors have moved funds out of assets included in M3 and into riskier assets as economic uncertainties have diminished, this has been slower than in similar periods previously
"This may reflect a greater aversion of households and firms to risk than in the past, given the stock market losses experienced between 2000 and the spring of 2003," it said
There is still a risk that excess liquidity could lead to inflation risks in future, it said
Loans growth has been robust in recent months and growth in mortgage loans to households is "rather high", it said
The bulletin editorial is normally closely in line with ECB president Jean-Claude Trichet's introductory statement to the central bank's monthly news conference held the week before
But the ECB holds no news conference in August and the bulletin therefore acts as its main vehicle for communicating its current thinking on inflation pressures and the euro zone economy.
ECB says inflation risks need to be monitored closely, concern over oil
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12-08-2004 05:39
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