FRANKFURT (AFX) - Bundesbank president Ernst Welteke said the European Central Bank must continue to keep risks to price stability low in 2001 and counter possible effects from the high price of oil. "The Eurosystem has difficult tasks ahead in 2001," Welteke wrote in the preface to the Bundesbank's annual report. "In monetary policy the main task will be to keep inflation risks small and counter second round effects from oil price rises."
He added that a "steady hand" monetary policy makes a contribution to keeping expectations on the financial markets stable.
Welteke's remarks come after he said last week that although risks to price stability have lessened in the euro zone, they have not disappeared, owing to the BSE crisis in agriculture and the effects of higher oil prices.
The Bundesbank said in its annual report that the ECB has left interest rates unchanged recently because of the moderation in money supply growth.
"But the uncertainties for the euro system have remained very high," it said.
The Bundesbank said that in Germany the recent crises in agriculture have put upward pressure on prices, while the effects from the past oil price rises have yet to be overcome.
"The agricultural crises have had considerable effects on food prices," the Bundesbank said.
It said despite the current economic slowdown in the euro zone there will not be a "continued and marked economic weakening" in the area. "Rather, there is evidence to suggest the euro zone will continue to grow at a considerable rate in 2001," it said, adding that tax cuts expected to come into force this year as well as a reduction in oil prices should bolster private consumption in the euro zone.
However, the Bundesbank also cautioned that the risks to economic growth have increased because of the slowdown in the U.S.
"The economic risks in Europe have increased", the Bundesbank said. "Above all a hard landing in the U.S. could disturb euro zone economies for a time," it said.
The U.S. slowdown will also have a greater effect on the German economy than previously estimated by Germany's economic institutes in their Autumn forecasts, it said.
The Bundesbank also said divergent inflation rates in the euro zone have led to demands for the ECB to interpret its price stability criteria more generously.
However, although the differences in inflation are "certainly not small" in the euro zone, changing the current price stability ceiling of 2 pct inflation is not an option, it said.
"A new definition of the price stability norm should not come into question as it would permanently damage the credibility of the ECB's monetary policy," the central bank said.
It added that interest rate hikes last year by the ECB are not signs of a truly restrictive monetary policy, as the risks to price stability last year increased by more than was expected.