December 2, 2004
By Jonathan Gould
Yahoo Finance
FRANKFURT (Reuters) - European Central Bank President Jean-Claude Trichet kept up his anti-inflation rhetoric on Thursday, warning of short-term risks to the inflation outlook even as growth prospects are deteriorating.
Trichet, speaking after a meeting which as expected kept the ECB's official interest rate at 2 percent, said rate cuts were not discussed.
However, later in answer to questions, he said the meeting had examined the possibility of a rate hike. "We did not examine at all the option of decreasing rates," he said.
High oil prices are both taking their toll on growth prospects and pushing up headline inflation numbers, Trichet told a news conference.
But the ECB remains confident that inflationary pressures will recede in 2005 and that there are no significant signs that higher oil is pushing up prices more broadly.
"All in all, the short-term outlook for inflation remains worrisome, but our assessment of price developments over the medium term is unchanged," Trichet said.
"At the current juncture oil price developments are having a sizeable impact on consumer prices in the euro area, while there is no significant evidence that stronger underlying domestic inflationary pressures are building up."
He added that, "continued vigilance is of the essence with regard to those risks."
The ECB's policy statement contained no reference to the soaring euro, which hit a new record on Thursday at 1.3383 against the dollar. Pressed during his news conference, Trichet would only make his usual statement that recent sharp moves were unwelcome.
He declined to comment on a Financial Times report that euro zone authorities and Japan are discussing currency intervention, only saying that FX intervention is a tool that exists and he would "never" comment on using it.
EURO PRESSURE
Politicians are starting to urge the ECB to consider intervention or an easier monetary stance to keep recovery on course and tame the euro's strength.
A strong euro was blamed for the stagnating manufacturing sector in November, following a sharp slowdown in third quarter growth conditioned by high oil prices.
The strong euro has been eating away at euro zone business confidence. It was blamed for a drop in Germany's key Ifo index in November to its lowest level since September 2003 and for bringing growth in the November Eurozone Manufacturing Purchasing Manager's Index almost to a standstill.
The ECB released staff economic forecasts that include new projections for inflation and growth through 2006. He said gross domestic product growth is seen at between 1.6 percent and 2.0 percent this year and between 1.4 percent and 2.4 percent in 2005. This marks a downward revision of the 2005 midpoint 1.9 percent from 2.3 percent in the September forecasts.
Italy's and Spain's prime ministers complained at a joint meeting this week that the euro rise was damaging to exports and should be discussed by European Union leaders.
"How could we not have talked about the pain of the euro?" Italian premier Silvio Berlusconi said when asked whether he had discussed the currency with his Spanish counterpart.
But the euro has been helping to keep a lid on the cost of imported crude oil, which is priced in dollars. Euro zone inflation eased to an annual 2.2 percent in November, from 2.4 percent in October, preliminary data showed this week. That is still above the ECB's 2 percent ceiling.
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