FRANKFURT, Oct 13: The European Central Bank kept up its sabre-rattling on interest rates on Thursday, saying it was on high alert to potential inflationary risks in the eurozone economy.
The guardian of the euro remained “strongly vigilant” with regard to the inflationary effects of runaway oil prices and excess liquidity, a number of top ECB officials, including president Jean-Claude Trichet, said separately on Thursday.
And the ECB itself hammered home the same message in its latest monthly report.
Given the recent oil price developments, the short-term outlook for inflation has significantly deteriorated, the ECB wrote its October monthly bulletin.
Euro area-wide inflation, as measured by the harmonised index of consumer prices (HICP), “could remain at its current elevated levels for the rest of 2005,” the bank warned.
In September, eurozone inflation shot up to 2.5 percent, way above the ECB’s ceiling of 2.0 percent.
The ECB closely monitors the money supply because it sees a link between the level of liquidity in the economy and future inflation.
And the money supply has been growing much faster than the ECB would like for some time.
“Strong monetary and credit growth, in the context of an already ample liquidity situation, points to risks to price stability over the medium to longer horizons,” the bank warned in its report.
In a newspaper interview, ECB governing council member and Greek central bank chief Nicholas Garganas said the bank would see no reason to tighten monetary conditions in the euro area providing inflation fell below 2.0 percent next year.
Asked why the ECB had not yet tightened monetary conditions in the single currency area with inflation currently above 2.0 percent, Garganas replied: “Our extensive analysis shows no indication of future inflationary pressures building up.”
He added: “The fact that price risks are currently high does not justify action.
“If our assessment backs up the current forecast that inflation will gradually fall back below 2.0 percent in 2006, there will be no reason to act.”—AFP
