The European Central Bank remains cautiously confident inflation will subside next year and the economic recovery will strengthen, despite rising oil prices, top policymakers said on Monday. Sending a message that interest rates are likely to remain on hold for some months, the ECB central bankers saw no immediate dangers ahead although they are extremely vigilant. ECB chief economist Otmar Issing said monetary policy was "well aligned," while Bundesbank President Axel Weber said nothing has changed substantially since the ECB at its September meeting kept rates at 2.00 percent for the 15th straight month. These remarks came even as crude oil climbed back above $46 a barrel in New York trade for the first time in a month , reviving concerns about the euro-zone's resilience. But Issing said oil prices would have to increase very sharply to derail the outlook for price stability and steady recovery.
"The existing level gives no reason to worry about further (economic) development," he told reporters after delivering a speech on the euro currency. The ECB is forecasting inflation next year retreating to around 1.8 percent, after reaching 2.3 percent in August, and it forecasts growth accelerating to about 2.3 percent from 1.9 percent this year. "The underlying scenario of a gradual recovery is broadly still intact. We have no reason to reconsider it at this stage," Weber told reporters at a separate event where ECB President Jean-Claude Trichet delivered a speech on the international financial structure. Trichet made no comments on the economic or monetary outlook, saving his fire for his testimony before the European Parliament on Wednesday. Rather his speech focused on how improvements in releasing economic and financial data and better monitoring of risks by international institutions and central banks have improved global financial stability. He did, however, urge Europe to proceed with structural reforms and the United States to tackle its twin budget and trade deficits in order to redress global imbalances.
RED ALERT
Even as they struck an optimistic tone for the euro zone, both ECB deputies repeated Trichet's line delivered at his news conference on Sept. 2 that the central bank is on heightened alert. "We are observing the risks to price stability with great vigilance," said Issing. Both he and Weber said they expect consumer inflation to fall below the ECB's 2.00 percent ceiling in the second quarter of 2005. Issing added that he expected inflation then would "stay there for the foreseeable future." "What the ECB can do and must do is to prevent second-round effects from inflation expectations, whether they be seen in capital market rates or in wage rises," Issing said. So far, these second-round effects are a low risk given the weakness in the jobs market, he said. Issing added that he is not happy with weak growth at 2.00 percent but he noted that ECB's mandate is to achieve price stability. While Weber said there are short-term risks to the outlook for achieving price stability next year, he said these are "transitory in nature." "Risks to price stability are still visible. It calls for strong vigilance in terms of second-round effects," he said. As for the September fall in ZEW German investor confidence index to a 15-month low on the back of strong oil prices for the euro-zone's largest economy, Weber was not overly perturbed. He called it just one of a range of data that the central bank looks at. He said that ECB policymakers have "no reason to be skeptical" about the prospects for a gradual recovery either in Germany or the euro zone. For Germany, he expects economic growth this year of 1.75 percent, a rebound from its 0.1 percent contraction in 2002//