Trichet says mid-term inflation outlook subject to upside risks UPDATE

Trichet says mid-term inflation outlook subject to upside risks UPDATE

	Published : Wed, 21 Mar 2007 10:45 By : Agencies Print this Story

(Updates with further comments on monetary situation)

BRUSSELS (AFX) - European Central Bank president Jean-Claude Trichet warned that euro zone inflation risks remain on the upside despite the bank's recent interest rate rises.

Recent confidence surveys and indicators suggest that euro zone activity is robust and that the economy looks set 'to grow solidly', Trichet told the European Parliament's economic and monetary affairs committee.

'In the governing council's view, the risks surrounding this favourable outlook for economic growth are broadly balanced over the shorter term,' he said.

'At longer horizons, risks lie mainly on the downside, relating to the possibility of a renewed increase in oil prices, fears of a rise in protectionist pressures and concerns about possible disorderly developments owing to global imbalances,' he said.

He said that last year's volatility in energy prices will lead to significant base effects regarding annual inflation rates this year.

'Accordingly and on the basis of the current level of oil prices and oil price futures, annual inflation rates are likely to fall during the spring and summer before rising again towards the end of the year and then hovering again at around 2 pct,' he said.

'At the policy-relevant medium-term horizon, the outlook for price developments remains, in our view, subject to upside risks,' he said.

'These stem from the possibility of renewed oil price increases and additional increases in administered prices and indirect taxes over and above those announced and decided thus far,' he said.

Trichet said the ECB is monitoring wage negotiations have ry carefully'.

On M3 money supply growth, he said that in the medium to long term 'the latest developments confirm the continuation of a persistent upward trend in the underlying rate of monetary expansion'.

After several years of robust monetary growth, liquidity in the euro zone is ample.

'The robust expansion of money and credit in an environment of ample liquidity points to upside risks to price stability over the medium to longer term,' he said.

'Monetary developments therefore continue to require very careful monitoring, particularly against the background of a solid expansion in economic activity and continued strong property market developments in many parts of the euro area,' he said.

Trichet said the ECB was only able to keep rates at historically low levels for two and a half years because of consistent signs that inflation expectations were well anchored.

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