ECB plans review of inflation risks

EUROPEAN Central Bank president Jean-Claude Trichet said the bank is reviewing its assessment of inflation risks after growth in the 17-nation eurozone slowed.

“Risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections that will be released early September,” Trichet told the European Parliament’s economic committee in Brussels yesterday.

The comments contrast with Trichet’s last policy statement on August 4, when he said risks to the inflation outlook were “on the upside”.

A switch in the ECB’s language on price risks may herald a change in its policy stance. The bank, which has raised its benchmark interest rate twice this year to 1.5%, is unlikely to increase it again until 2013, Citigroup economists said last week.

“The ECB is preparing the ground for no further rate increases,” said Alexander Krueger, head of capital market analysis at Bankhaus Lampe. “Against the background of the sovereign debt crisis and an easing of the inflation situation, I can’t imagine them raising rates.”

Eurozone growth slowed to 0.2% in the second quarter from 0.8% — with the German economy almost grinding to a halt — as Europe’s debt crisis roiled financial markets and weighed on confidence.

European Commissioner for Economic Affairs Olli Rehn, speaking to the same parliamentary panel yesterday, indicated the EU may lower its growth forecasts when it issues new projections on September 15, saying it is “seriously concerned” about financial turbulence spilling over into the broader economy.

“All in all, the short-term growth prospects have somewhat worsened compared to our spring forecast,” he said.

In May, the EU projected GDP would grow 1.6% in the eurozone this year and 1.8% in 2012.

“Inflationary risks, which were already low before this summer’s turmoil, now seem irrelevant,” said Marie Diron, an economist at Oxford Economics.

“In this context, the ECB needs to make it clear that the outlook has changed and that it is adjusting policy accordingly.”

German inflation slowed more than economists forecast in August, with the rate dropping to 2.4% from 2.6%.

Trichet said eurozone inflation, currently at 2.5%, will stay above the ECB’s 2% ceiling “for some months” and policy makers are determined to ensure that price expectations remain contained.

In June, the ECB forecast inflation would average 2.6% this year and 1.7% in 2012. It predicted economic growth would slow to 1.7% next year from 1.9% in 2011. The central bank updates its projections every three months.

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