The European Central Bank said inflation pressures in the euro area should slow next year as the sovereign debt crisis damps growth.
“The intensified financial market tensions are continuing to dampen economic activity in the euro area and the outlook remains subject to high uncertainty and substantial downside risks,” the Frankfurt-based ECB said in its monthly bulletin today, echoing President Mario Draghi’s Dec. 8 policy statement. “In such an environment, cost, wage and price pressures in the euro area should remain modest over the policy-relevant horizon. Inflation is likely to stay above 2 percent for several months to come, before declining to below 2 percent.”
The ECB last week cut its benchmark interest rate for a second consecutive month, taking it to 1 percent. The central bank also slashed its 2012 growth forecast to 0.3 percent from 1.3 percent and predicted inflation will slow to an average of 2 percent next year and 1.5 percent in 2013 from 3 percent today.
“Downside risks notably relate to a further intensification of the tensions in euro-area financial markets and their potential spillover to the euro-area real economy,” the ECB said, adding that the global economy “may be weaker than expected.”
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