European Central Bank council member Axel Weber said the economic outlook in the euro area has improved markedly and inflation risks could increase.
“The economic outlook has brightened considerably,” Weber, who heads Germany’s Bundesbank, said in a speech in Vallendar today. “Risks to the medium-term outlook for inflation, which are so far still broadly balanced, could well move to the upside.”
ECB President Jean-Claude Trichet yesterday put inflation fighting back on the central bank’s agenda, signaling it will raise interest rates if needed to keep price gains in check. Inflation accelerated to 2.2 percent last month, breaching the ECB’s 2 percent limit for the first time in more than two years, and Trichet said it may quicken further before moderating toward the end of the year.
Citigroup Inc. revised its forecast for the ECB’s first rate increase to the second half of this year from the first quarter of 2012. The ECB yesterday left its benchmark rate at a record low of 1 percent.
Current rates “still remain appropriate” since faster inflation is “largely the result of short-term upward pressure on prices, mainly owing to energy prices,” Weber said. “Inflationary pressures over the policy-relevant medium term are expected to remain contained and in line with price stability.”
Still, “price developments have to be monitored very closely,” he said, echoing remarks by Trichet and ECB Executive Board members Juergen Stark and Jose Manuel Gonzalez-Paramo.
Economic divergences in the euro area are making it harder for the ECB to set a one-size-fits-all monetary policy. The sovereign debt crisis is damping growth in peripheral countries such as Greece, Ireland and Portugal while northern European nations such as Germany are powering ahead.
While the crisis “has so far not impacted significantly on euro-area economic developments,” Weber said it “still poses a serious challenge for the euro area as a whole that needs to be resolved before it potentially becomes a more serious threat to the recovery.”
The German economy, Europe’s largest, grew 3.6 percent last year, the fastest pace in two decades. By contrast, the Greek, Irish and Spanish economies shrank in 2010, according to European Commission estimates. Portugal’s is forecast to contract this year. The ECB last month forecast euro-area growth will slow to about 1.4 percent this year from 1.7 percent in 2010.
Weber said the economic outlook has improved not just for Germany “but also for the euro area in general.”
“Hence, even though for the euro-area risks for the economic outlook are still tilted slightly to the downside, the recovery should continue.”
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