European Economies: Garganas Says ECB May Raise Price Outlook
July 12 (Bloomberg) -- European Central Bank council member Nicholas Garganas said record oil prices may force the bank to revise up its inflation forecasts, dismissing politicians' calls for lower interest rates.
``The oil price increases in recent weeks imply some upward revision to the main scenario for inflation,'' said Garganas, who is also the governor of the Bank of Greece, in an interview in Athens yesterday. ``The longer these high oil prices last, the higher the risks are to inflation in particular.''
Belgian Finance Minister Didier Reynders said yesterday the bank has ``room for maneuver'' on interest rates, contrasting with Garganas and at least six other ECB policy makers who said in the past week that rates are low enough to help growth. Economic expansion in the euro region will fall short of forecasts in 2005 as oil hovers near a record, consumer confidence stagnates and Italy struggles with recession, European finance ministers said.
``One shouldn't really expect too much from monetary policy as far as its contribution to growth is concerned,'' said Garganas, 68. The bank has kept its benchmark interest rate at a six-decade low 2 percent for more than two years.
``Also, the fact that the dollar has strengthened gives an additional competitive advantage to many euro-area economies now and this should push exports further,'' Garganas said.
Bond yields gained on the comments. The yield on the German 10-year bund rose as much as 3 basis points to 3.26 percent, the highest since June 21. Yields retreated from their highs after Efe Newswire reported an explosion at the Italian Culture Institute in Barcelona. A basis point is 0.01 percentage point.
Pressure to Cut
The euro has declined 11 percent against the U.S. dollar this year, making European goods cheaper for overseas buyers while increasing the cost of imports. The euro traded at $1.2186 today, compared with a record $1.3666 on Dec. 30.
The weaker euro exacerbates the effect of rising oil prices, which are denominated in dollars and climbed as high as $62.10 on July 7 in New York. The bank last month said inflation will slow to about 1.5 percent in 2006 from 2 percent this year. The ECB said its forecasts assumed an exchange rate of $1.29 and that the price of oil would be $50.60 in 2005 and $50.70 in 2006.
If the ECB substituted current market rates for the forecast assumptions for oil prices and the euro, ``they would have to raise their forecast for next year to 2 percent,'' said Klaus Baader, an economist at Merrill Lynch & Co. in London. ``Six weeks ago, it looked like achieving price stability in 2006 would be a walk in the park. Now it looks like an uphill battle.''
OECD, Juncker
The Organization for Economic Cooperation and Development today urged euro-region nations to step up labor and service market reforms to reduce inflation and give the ECB more leeway to bolster flagging growth.
The outlook for slowing growth had prompted calls for lower rates in the region. European Commission forecasts show growth in the dozen euro nations will trail the U.S. for the 13th year in 14 this year. Italian Prime Minister Silvio Berlusconi in April called the ECB's monetary policy ``destructive.''
Confindustria, Italy's largest employers' lobby, predicted today that the Italian economy, Europe's fourth-biggest, will shrink 0.3 percent this year, its first contraction in 12 years.
Finance ministers are now predicting growth of just 1.3 percent in the euro area, less than the 1.6 percent predicted by the commission in April, Luxembourg Prime and Finance Minister Jean-Claude Juncker said in an interview in Brussels yesterday.
Hurley Agrees
Garganas dismissed the need for a cut for now while conceding that the region ``won't see strong growth rates for a while.''
``What is needed are measures to boost potential output and also boost confidence,'' he said. ``This is what Europe's mission is at the moment. Monetary policy is already very accommodative.''
Garganas's Irish counterpart, John Hurley, echoed those remarks in an e-mailed statement today. Rates are ``appropriate,'' while oil costs and low confidence pose risks to growth, he said.
European consumer confidence remained at the lowest level in a year in June, held back by job concerns amid an 8.8 percent unemployment rate. Business confidence rose the for the first time in nine months as the euro's decline improved exporters' prospects, the European Union statistics office said June 30.
The world economy can also help. Global economic growth will probably reach 4.3 percent this year after expanding 5.1 percent in 2004, the fastest pace in three decades, the International Monetary Fund said on April 13.
``Global demand and improved price competitiveness should support exports of the euro area,'' said Garganas. ``Looking beyond the short term, the fundamentals are in place for a gradual pickup in economic activity.''
Too Much Money
Investors have reined in bets on an ECB rate cut this year. The implied rate on the December three-month interest-rate future contract was 2.10 percent at 10:59 a.m. in Frankfurt, up from as low as 1.96 percent June 22.
The contracts settle to the three-month euro-area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's key rate since the currency's start in 1999. That rate is at 2.12 percent.
Two years of cheap credit has pumped more money into the $9.3 trillion euro area economy than needed for inflation-free growth and fueled double-digit house price increases in countries such as France and Spain, according the ECB.
``Monetary policy should try to avoid creating conditions that would favor the creation of bubbles,'' Garganas said. ``That is why this ample liquidity has been a cause of concern for a number of months, if not years now.''
To contact the reporter on this story:
Brian Swint in Frankfurt at
[email protected].
Harry Papachristou in Athens at
[email protected]
... Visto che la ECB dice che l'inflazione forse, ma forse, non è poi cosi' bassa...come voler fare una diga con un kleenex...la pazienza è la virtù dei forti 
...il mal di c...lo però mi perseguita... fate i bravi 
