Papademos affirms anti-inflation policy

TIANJIN, China – The European Central Bank (ECB) has no bias toward future monetary policy, but remains vigilant toward upside risks in inflation next year, its vice president, Lucas Papademos, said yesterday. While inflation was projected to decline to levels compatible with price stability next year, to a projected mid-point of 1.5 percent, upside risks existed amid potential rises in oil prices and indirect taxes, he said on the sidelines of a meeting of Asian and European finance ministers. «Although the outlook for price stability in 2006 is favorable, this outlook is surrounded by risks that on the whole remain on the upside and call for vigilance,» he told Reuters in the northern Chinese port city of Tianjin. Asked how this might affect the outlook for interest rates, he said, «We have made it clear that at this point in time we have no bias concerning the direction of monetary policy in the future.» «Every month we assess carefully the outlook for price stability and the associated inflation risks and decide accordingly,» he said. Papademos reiterated that current levels of interest rates, their lowest in decades at 2.0 percent, were appropriate for securing price stability over the medium term. Financial markets are pricing in a chance of an ECB rate cut, as growth in the eurozone is expected to slow to 1.6 percent or less in 2005 from 2004’s 2.1 percent. Expectations of a rate cut firmed after Sweden cut its rates by a larger-than-expected 50 basis points and minutes from the Bank of England’s June meeting showed that two of nine policy-makers had voted for a cut. «Markets form their own expectations. What I would like to stress is that we believe that, given the available information and our assessment for price stability, the current level of interest rates is appropriate,» he said. Growth rates have eased in the 12-nation single-currency bloc and a political crisis has engulfed the EU after two of its founding members rejected the EU Constitution and European leaders failed to agree on a 2007-2013 budget. Papademos said economic growth was expected to pick up in the second half of this year, but that potential oil price increases and global imbalances posed a risk to this scenario. «There are risks but I should also emphasize here that further oil price increases pose risks simultaneously to inflation, to price stability, to be more precise, and to economic growth,” Papademos said. The euro has taken a beating against the dollar since late March, fanning fears among some analysts that it may lose appeal for global central banks. Asked if Asian central banks remained supportive of the euro despite political turmoil and low interest rates, Papademos said, «There are no indications that there is any change in the views and preferences of Asian central banks concerning the euro.»

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