ECONOMY

Greece’s headline inflation rate to go below 3 percent by end of year

FRANKFURT – Greece’s headline inflation rate should see a steady decline this year and drop below 3 percent by the end of this year, Bank of Greece Governor Lucas Papademos said in an interview yesterday. «Inflation is expected to decline to below 3 percent by year-end and a significant drop is already expected in February,» Papademos told Reuters in a telephone interview. The bank’s inflation forecasts will be included in its monetary policy report to be sent to the Greek Parliament in early March. While Greece’s headline inflation rate rose sharply in January to 4.4 percent year-on-year from 3.0 percent in December, the reasons for the rise were the same as in other eurozone countries and should be temporary, said Papademos, who is also a member of the European Central Bank’s policymaking council. Of the 1.4-percentage-point increase between inflation rates from December to January, 0.6 percentage point came from higher food prices due to unusually bad winter weather and a further 0.6 percentage point from the unfavorable base effects of falling energy prices last year. Only 0.1-0.2 percentage point was associated with the impact of the changeover to the euro currency, he said. Price hikes due to the launch of the euro were limited to a few goods, mainly sold by small retailers, he added. EMU experience satisfactory Papademos said Greece’s economic performance after the first year of membership in the monetary union had been satisfactory. The annual average of Greek inflation in 2001 was 3.4 percent, which was higher than the eurozone average, but Greece did not experience a significant rise in inflation following entry into the monetary union. «A number of analysts were concerned that the substantial relaxation of monetary conditions associated with eurozone entry would involve large inflation risks, but we have seen that these risks did not materialize.» Inflation did go up in 2001, but for the same reason that it did in other eurozone countries, namely, the delayed impact of substantial energy price rises and the dollar’s appreciation against the euro, he said. At the same time, Greece’s economy is estimated to have grown 4 percent or more in 2001, despite the global slowdown. Still, Greece must continue to implement market reforms to achieve a permanent increase in productivity growth and improve the international competitiveness of Greek firms if it is to bridge the gap in living standards with those of the rest of the eurozone. Possible candidate Also, the government should maintain its prudent budgetary policy in the years ahead, he said. A key reason for this is that further reducing debt-servicing costs will increase the government’s flexibility to deal with any external shocks to the economy in the future. Papademos has been mentioned as a possible candidate to replace current European Central Bank Vice President Christian Noyer, who is due to step down at the end of May. Papademos declined to comment on the succession issue.