Papademos says spike of oil prices not as serious as before

High oil prices «cannot fail to make an impact» on the economy of the eurozone but the current situation in the global energy market differs from the 1973-74 oil crisis, according to Lucas Papademos, vice president of the European Central Bank (ECB). Interviewed on Sunday by the Italian financial paper Il Sole 24 Ore, Papademos argued that in 1973-74 oil prices increased rapidly over a limited, two-month period, while their current upward trend, albeit accelerated during the last few months, has already lasted for 67 months. Thus, according to the ECB official, «this means that the trend has already exerted much of its impact on inflation and growth.» Papademos explained that the ECB projects that for every 10 percent rise of oil prices, growth rates decelerate by 0.05 percent during the first and the second year and by an additional 0.1 percent during the third year, with inflationary pressures amounting to 0.1 percent during the first year and by approximately the same rate on a annual basis during the two following years. Papademos maintained that «if oil prices remain in excess of but not far above $40 per barrel, inflation in the eurozone would exceed 2 percent per annum until the end of 2004 and for a few months in 2005.» Yet he reiterated the formal position of the ECB, according to which the average inflation rate in the area will be limited to less than 2 percent in 2005 as well as in 2006. Annual inflation in the 12 member countries of the eurozone amounted in July to 2.4 percent. Comparing the current prices of oil with those of crises in the past, Papademos said that «in real terms, the oil price is at a relatively low level and far lower today than it was in the late 1970s. Moreover, the reliance of many economies on oil has declined.» When asked to compare growth trends in the US and the eurozone, Lucas Papademos said that the differentiating factors «are population trends, differences in the growth rates of productivity and the degrees of labor force utilization. The negative impact of an aging population – in the eurozone – must be offset by introducing measures to boost the contribution of the other two factors to euro area growth.» The vice president of the ECB also explained the reasons behind the bank’s decision to no longer use the adjective «appropriate» in its communiques when referring to the levels of interest rates. He said that policy decisions are made in an uncertain environment and that the ECB should not send out specific signals or express its «bias» regarding its future policy stance since «if an unforeseen event arises, a central bank would be forced to surprise markets unpleasantly.»

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