12 December 2002, 12:23  ECB Monthly Report

FRANKFURT (MktNews) - The following is the second part of the full text of the editorial section of the ECB's monthly report for December. The subdued economic activity should limit potential upward risks to price stability and help to ease inflationary pressure. Moreover, the higher level of the euro exchange rate compared with earlier this year will contribute further towards reducing inflationary pressure. It is also expected that the indirect effects of previous increases in oil prices and the impact of other factors on inflation will further unwind. Although wage- related risks remain in place, they are judged less likely to materialise as long as the economic environment does not change substantially.
Against this background, the staff projections, which envisage annual average HICP inflation in a range of 2.1 to 2.3% in 2002, see it declining to between 1.3 and 2.3% on average in 2003. In 2004, HICP inflation is projected to be between 1.0 and 2.2%. Available forecasts also point to lower inflation rates in 2003 and 2004. Overall, the reduction in the key ECB interest rates on 5 December 2002 was guided by the assessment that prospects have strengthened for inflation to fall below 2% in the course of 2003 and to remain in line with price stability thereafter. This decision should also help to improve the outlook for the euro area economy by providing some counterweight to the downside risks to economic growth, thereby supporting confidence.
The most likely scenario is that economic growth will gradually recover in the course of 2003 towards rates more in line with potential. Falling inflation should support real disposable income and, together with a reduction in the current gap between perceived and actual inflation, should underpin private consumption. Moreover, exports are expected to strengthen in line with a gradual recovery in foreign demand. This, together with the low level of interest rates, should benefit investment. The key ECB interest rates have now reached a very low level by historical standards. The Governing Council will continue to monitor closely all factors that may affect the prospects for inflation in the euro area.
The outlook for the euro area economy will also very much depend on visible progress in other policy areas. Regarding fiscal policies, the Governing Council reiterated that budgetary discipline strengthens the conditions for sustainable growth of GDP and employment. The recent European Commission communication is a good starting point for strengthening confidence in the budgetary framework. The Governing Council, as already reflected in its statement on the Stability and Growth Pact of 24 October 2002, fully supports the Commission's main objective, namely to improve the implementation of the Pact within the existing framework of rules. Sound fiscal positions, as enshrined in the Treaty and further developed in the Stability and Growth Pact, are in the interest not only of Monetary Union but also of all the Member States. Given the disappointing fiscal
developments in some countries and the challenges which have recently emerged to the EU fiscal framework, the actions to correct or prevent excessive deficits, i.e. the implementation of excessive deficit procedures in the case of Germany and Portugal and the early warning issued to France, are important. Countries with remaining imbalances are urged to prepare sufficiently ambitious consolidation plans for their forthcoming stability programmes. Emphasis should be placed on a growth- oriented consolidation policy that strengthens the productive forces of the economy. As regards the structural reform agenda, the Governing Council noted with some concern the slow progress in many euro area countries and called on governments to take determined action. The medium-term impact of these reforms on the economic growth potential of the euro area should be substantial. A prompt implementation of structural reforms in labour, product and financial markets is particularly important at this juncture since it would contribute to strengthening confidence in the euro area, thereby also supporting economic activity in the short term. //www.marketnwes.com

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