European Central Bank President Jean-Claude Trichet said the bank is reviewing its assessment of inflation risks after growth in the 17-nation euro area slowed.
“Risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections that will be released early September,” Trichet told the European Parliament’s economic committee in Brussels today. The comment contrasts with Trichet’s last policy statement on Aug. 4, when he said risks to the inflation outlook were “on the upside.”
A switch in the ECB’s language on price risks may herald a change in its policy stance. The central bank, which has raised its benchmark interest rate twice this year to 1.5 percent, is unlikely to increase it again until 2013, Citigroup Inc. economists said last week.
“The ECB is preparing the ground for no further rate increases,” said Alexander Krueger, head of capital market analysis at Bankhaus Lampe KG in Dusseldorf. “Against the background of the sovereign debt crisis and an easing of the inflation situation, I can’t imagine them raising rates.”
Euro-area growth slowed to 0.2 percent in the second quarter from 0.8 percent in the first — with the German economy almost grinding to a halt — as Europe’s debt crisis roiled financial markets and weighed on confidence.
Growth, Inflation
European Union Economic and Monetary Affairs Commissioner Olli Rehn, speaking to the same parliamentary panel today, indicated the EU may lower its growth forecasts when it issues new projections on Sept. 15, saying it is “seriously concerned” about financial turbulence spilling over into the broader economy.
“All in all, the short-term growth prospects have somewhat worsened compared to our spring forecast,” he said. In May, the EU projected gross domestic product would grow 1.6 percent in the euro area this year and 1.8 percent in 2012.
“Inflationary risks, which were already low before this summer’s turmoil, now seem irrelevant,” said Marie Diron, an economist at Oxford Economics in London. “In this context, the ECB needs to make it clear that the outlook has changed and that it is adjusting policy accordingly.”
German inflation slowed more than economists forecast in August, with the rate dropping to 2.4 percent from 2.6 percent, a report showed today.
Expectations
Trichet said euro-area inflation, currently at 2.5 percent, will stay above the ECB’s 2 percent ceiling “for some months” and policy makers are determined to ensure that price expectations remain contained.
ECB council member Ewald Nowotny said in an interview published Aug. 27 that he sees no upward pressure on inflation expectations.
In June, the ECB forecast inflation would average 2.6 percent this year and 1.7 percent in 2012. It predicted economic growth would slow to 1.7 percent next year from 1.9 percent in 2011. The central bank updates its projections every three months.
“Looking ahead, we continue to see the euro-area economy growing at a modest pace in a context of overall relatively sound economic fundamentals for the euro area as a whole,” Trichet said. “At the same time, not least because of the recently re-emerged tensions in financial markets, uncertainty remains particularly high.”
Bond Purchases
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Trichet defended the ECB’s purchases of government bonds on the secondary market, saying they are aimed at restoring the transmission of monetary policy and are not a substitute for fiscal discipline.
The ECB was forced to start buying Italian and Spanish securities on Aug. 8 after politicians failed to convince investors they could contain the region’s debt crisis.
The bank said today it settled 6.65 billion euros ($9.7 billion) of purchases in the week through Aug. 26, down from 14.3 billion euros in the previous week and a record 22 billion euros the week before that.
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