ECB inflation warning fuels speculation rates will not fall
THE European Central Bank warned yesterday that it expects high rates of inflation "for a protracted period of time" in what was interpreted as meaning a cut in rates this year is now unlikely.
ECB president Jean-Claude Trichet said after the ECB left interest rates unchanged, as expected at 4pc, that the growth risk in the eurozone was uncertain.
Economists said the remarks on inflation suggested that rates would remain unchanged for some time yet.
"Inflation rates have risen significantly since the autumn, owing mainly to increases in energy and food prices," Mr Trichet told a news conference in Athens following a meeting of the ECB governing council in the Greek capital.
"As we have said on previous occasions, inflation rates are expected to remain high for a rather protracted period of time, before gradually declining again," he said.
Inflation has remained above 3pc for the past six months.
According to European statistics agency Eurostat's first estimate it reached 3.3pc in April -- well above the ECB's target of just below 2pc.
On the basis of current prices on the futures markets, inflation will remain "significantly" above 2pc in the coming months and then moderate "only gradually" over the course of 2008, Mr Trichet said.
On growth, he said that despite the fact that economic expansion will slow this year, the economic fundamentals of the euro area are "sound".
"The uncertainty surrounding this outlook for economic growth remains high and downside risks prevail.
"In particular, risks relate to the potential for the financial market turbulence to have a more negative impact on the real economy than previously anticipated," he said.
"Moreover, downside risks stem from the dampening impact on consumption and investment of further unanticipated increases in energy and food prices.
Risks also arise from protectionist pressures and the possibility of disorderly developments owing to global imbalances," the ECB chief said.
Ulster Bank economist Simon Barry said there was not much sign of a shift in the ECB's thinking in inflation, and he stuck to his forecast that rates would remain unchanged this year.
He pointed to the heavy emphasis in Mr Trichet's remarks on the importance of coming wage negotiations in Europe.
IIB Homeloans economist Austin Hughes said Trichet's comments about inflation worries and poorer growth meant that if there are any cuts in interest rates they will not happen until the autumn.
But Mr Hughes held out the prospect of a cut of up to 0.50pc in interest rates by December.