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Thursday, December 11, 2003

The ECB Seems Set to Hold Rates

There is little sign that the ECB has any appetite to start raising rates. The situation with the Euro must be one of the first things on their mind. In addition inflation seems remarkably tame, and there is little sign of a dramatic growth spurt. Next years number is hardly startling, and I think we should wait a bit before we start anticipating 2005: there are still plenty of unknowns that could come in and cloud that picture.

The European Central Bank on Thursday raised its forecast for eurozone inflation in 2004 but signalled that interest rates were likely to remain on hold for some time amid caution over the outlook for growth.

The bank's twice-yearly projections, published in its monthly bulletin, forecast inflation next year of 1.8 per cent, up from 1.3 per cent in June and an unpublished estimate of 1.6 per cent in September. The ECB maintained its forecast for inflation this year of 2.1 per cent, but lowered its projection for inflation in 2005 to 1.6 per cent. The projections, widely leaked to the press last week, highlight the bank's concern over the "stickiness" of inflation which has proved far more stubborn than predicted earlier this year. But the bank acknowledged that the root cause of the stickiness has been big increases in indirect taxes and administered prices as eurozone governments battle to curb rising budget deficits........

The ECB's growth outlook for next year remained unchanged at 1.6 per cent before accelerating to 2.4 per cent, the eurozone's long term potential growth rate, in 2005. The bank said eurozone expansion would be fuelled by demand for exports from a faster growing global economy, offsetting to a large degree the impact of the strong euro. Growth would also be driven, it said, by a pick up in still weak domestic demand as business investment and private consumption recovered. The bank said an improving labour market should reduce the need for precautionary savings by households worried about unemployment and the prospect health care and pension reforms.
Source: Financial Times

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