ECONOMY

ECB’s Garganas sees Q2 GDP growth as slowing, expects higher 2007 inflation risk in eurozone

European Central Bank Governing Council member Nicholas Garganas said yesterday Greek economic growth could slow in the second quarter. «The growth rate of (Greece’s) gross domestic product (GDP) in the second quarter could slow down slightly compared to the first quarter and come in at just above 4 percent,» Garganas, who is also governor of the Bank of Greece, told reporters. He did not provide a reason for the drop. Based on the latest data, Greece’s -200 billion economy grew at a 4.6 percent annual pace in the first quarter. Garganas added: «If the current account deficit widens in the future, it could have a negative impact on the growth rate.» Greece’s current account gap is the highest in the eurozone at about 12 percent of GDP, and economists say it is unlikely to narrow soon due to a persistent trade deficit. But Garganas was optimistic about Greek inflation for 2007, saying it was seen as slowing to 2.9 percent from 3.3 percent in 2006. He said strong eurozone growth means inflation might be higher than expected in 2007. «Given the high rate of growth in the eurozone, it’s to be expected that inflation will steadily rise in the eurozone this year. The danger for higher-than-expected eurozone inflation is visible this year,» he said. «Demand in the eurozone is seen to be stronger than expected and there are inflationary risks. The US economy is at the stage of an upward rebound and is seen to be gradually recovering,» the Greek central bank chief continued. ECB staff forecast eurozone inflation of around 2 percent this year and next, just above the bank’s target. Inflation is currently 1.9 percent. Growth in 2007 is seen at around 2.6 percent, above the eurozone’s recent trend. Garganas also reiterated that the Governing Council would monitor economic developments closely. ECB interest rates now stand at 4 percent after eight quarter-point rises in 18 months. Most analysts expect the central bank to raise rates again in September, to 4.25 percent, but few see a further rise to 4.50 percent this year. «Based on our assessment of incoming data, we will do what is necessary to ensure that risks to inflation do not materialize. Having said that, we do not predetermine the path of monetary policy,» he said. (Reuters)

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