No inflation threat seen
FRANKFURT (Reuters) – High oil costs may keep eurozone inflation at 2 percent at least over the coming months, but there is no evidence of underlying consumer price pressure building up, European Central Bank Governing Council member Nicholas Garganas said. Garganas said the ECB would continue to be vigilant on the risk of higher inflation, adding that the central bank’s anti-inflation credibility was a major reason why higher oil prices had not fed through into the rest of the economy. «I see no significant evidence of underlying pressure building up. Inflationary expectations are well-anchored with our definition of price stability,» he said, referring to the ECB’s target of keeping inflation below, but close to 2 percent. «ECB credibility has been a main reason that higher oil prices have not triggered second-round effects,» he said in an interview published by Bloomberg news agency yesterday. «The oil price increases in recent weeks imply some upward revision to the main scenario for inflation. We now expect inflation not to go below 2 percent in the coming months, to hover around present levels, 2.1 or 2 percent,» he said. «And this is really why we continue to say that we remain vigilant, because of the risks involved,» he added. Garganas also said current ECB interest rates at 2 percent were appropriate and that the central bank would maintain its wait-and-see approach to economic developments, in line with comments made last week by ECB President Jean-Claude Trichet. The ECB forecasts consumer price inflation in a 1.8-2.2 percent range for 2005. «If we look a bit further, to the year 2006, domestic inflationary pressures remain contained in the euro area, but of course it’s absolutely essential to continue to be vigilant in order to keep inflationary expectations in line with our objective,» Garganas said. Eurozone government bonds turned early gains into losses after his comments dimmed prospects of an ECB rate cut in the near future. Garganas diverted market attention from the recessionary impact of higher oil prices to their inflationary effects. «It looks familiar to what’s been said before but if he’s suggesting an upward revision (to the inflation outlook) that could be undermining that market this morning,» said Ken Wattret, market economist at BNP Paribas. Garganas, who is also governor of the Bank of Greece, said he expected eurozone economic growth to pick up in the second half of 2005. But long-term growth in Europe risked not being as strong as in the past, he said. «My feeling is that potential growth is slower than it used to be. This is really the reason why we have all been urging governments to proceed with structural reforms,» he said. «One shouldn’t really expect too much from monetary policy as far as its contribution to growth is concerned,» he added. Separately, Garganas told reporters yesterday that the Bank of Greece would welcome further merger and acquisition activity in Greek banking to strengthen competition and economies of scale. «The Bank of Greece would encourage mergers and acquisitions (in Greek banking) because the average size of a Greek bank is small compared to other EU countries,» he said. «Foreign buyouts are welcome because they bring new products and knowhow. Personally I would like to see it happen,» he said.
