By BridgeNews
Frankfurt--Jan. 11-The European Central Bank Thursday significantly toned down its previous warnings about upside risks to price stability, but at the same time it suggested a rate cut wasn't looming, according to the ECB's January monthly bulletin.
* * * The central bank said that risks to price stability coming from monetary developments are now "more balanced" than a few months ago and notes that the stronger euro and lower oil prices will translate into lower inflation beginning in December. However, the bank warned there are "still elements of upward risk to price stability."
In addition, the ECB points to "increasing uncertainty surrounding the economic growth performance of the United States which may also have implications for the economic performance of other areas of the world." On the external front, it also notes "less favorable" developments in Japan "than anticipated some months ago."
But the bank still peppers its concerns with cautionary words on inflation risks. While the bank states that the "risks to price stability stemming from the monetary side have become more balanced when compared with the situation some months ago" it adds, "caution is still warranted given the upward deviation of M3 growth from the reference value of 4.5%."
Other economic developments point to "continuing robust, albeit slightly lower growth" in the euro zone, the ECB says, and evidence from consumer and business surveys confirmed the earlier assessment that industrial production peaked in the second quarter and then eased thereafter.
The bank notes with satisfaction that the financial markets reflect a general outlook for "sustained growth in the euro area" although this is "in a global environment of heightened uncertainty." It also notes the markets' expectation that inflation will develop "in line" with the bank's medium-term inflation target.
The ECB attributes the surge in November euro-zone inflation--to an annual 2.9% from 2.7% the previous month mainly down--to trends in energy prices and said the "pronounced appreciation" of the euro and the "significant" fall in oil prices seen since late November "should lead to a decline in annual consumer price inflation as from December 2000."
But clouding this outlook for tamer inflation are the lingering "elements of upward risks to price stability which warrant close monitoring." One of those risks is wage developments: wage bargainers, the ECB warns, should take into account the "firm determination" of the ECB to maintain price stability.
The decline in inflation should also help continued wage moderation.
The pace of structural reform and fiscal policy also entail risks to price stability. Many countries need to offset the tax cuts they have announced with structural reductions in government spending so as not to add to inflationary pressures. Further economic reforms will also be a key factor in supporting economic growth. End
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