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Thursday, May 15, 2003

Just How Much Do They Understand?

Reading these quotes from the ECB monthly bulletin, you really have to ask the question: how much idea do they have of what is really happening. Tunnel vision, would be another explanation. Obviously grwoth could improve later this year, and miracles could happen in 2004. But rather than exercising your imagination over what might happen in the best of all possible cases, maybe you should be dealing with the downside risks showing up on the radar right now, and these flash 'deflation alert'. Brad would be banging his head against the wall!

The European Central Bank said on Thursday that eurozone inflation risks were limited and that the economy would pick up later this year and accelerate in 2004.However, the statements - contained in the ECB's monthly bulletin - coincided with several eurozone countries reporting weaker-than-expected growth on the same day. Following its decision last week to hold interest rates steady at 2.5 per cent, the ECB said that its monetary policy stance remained consistent with price stability."Looking ahead, a gradual strengthening of real GDP growth is expected to start later in 2003 and to gather more pace in the course of next year," the ECB's report said. "Factors supporting this outlook are and expected recovery of global demand and the prospect of falling consumer price inflation benefiting real disposable income growth, and the low level of interest rates."

There were still downside risks to that assessment, the ECB said. Those included macroeconomic imbalances outside the euro area as well as concerns about the impact of the Sars virus. However, Germany, Italy and the Netherlands all reported on Thursday that their output had contracted in the first quarter of this year.Germany, Europe's biggest economy, shrank by 0.2 per cent during that period, raising the prospect that it will slip into recession this year. That news is likely to increase pressure on the ECB to cut eurozone interest rates when it meets next month.The ECB said that lower oil prices, an environment of moderate economic growth, and the effects of the significantly higher exchange rate of the euro would all contribute to reducing inflationary pressure beyond the short term. "Since the end of the military conflict in Iraq, the exchange rate of the euro has resumed an upward trend that started in early 2002. As a consequence, the nominal effective exchange rate of the euro is now close to the average level of early 1999," the ECB said.
Source: Financial Times

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