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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