European Central Bank sees inflation threat as Paulson says mortgage woes hurt US economy news
13 September 2007

Mumbai: The European Central Bank has warned that inflation still threatened the Eurozone economies but said it wanted more financial market data before deciding whether to raise interest rates.

The ECB''s monthly bulletin said global economic activity remained robust, supported mainly by buoyant emerging economies. But it added: "While the global repercussions of the US economic slowdown have so far been limited, it remains to be seen whether the recent financial market turmoil will lead to a lasting reappraisal of global financial market risks and a loss in confidence with possible implications for the real economy."

"There will be a penalty but the backdrop of the strength of the economy, the corporations, the institutions, is such that we are resilient," Paulson told the London daily The Times.

ECB governing council member Erkki Liikanen said it would take months for financial markets to return to normal after a liquidity crunch, caused by banks'' reluctance to lend to each other because of uncertainty over which may be hammered by losses in the teetering US mortgage market.

"The medium-term outlook for price stability remains subject to upside risks," the ECB said in its monthly bulletin.

But "given a high level of uncertainty" in the wake of the US home loan crisis, "it is appropriate to gather additional information and to examine new data before drawing further conclusions for monetary policy," it added.

The ECB was expected to raise its key lending rate on September 6, but president Jean-Claude Trichet left it unchanged at 4.0 per cent amid warnings that increasing the cost of borrowing in the eurozone would fuel tension within the global banking system.

Since then, the euro hit a record high of 1.3927 against the dollar, which could help stem inflation but also curb eurozone economic growth.

The bank stressed that economic fundamentals were strong in the 13-nation zone and that as a result, "the ECB''s monetary policy stance is still on the accommodative side," which means it believed inflation could strengthen as well.

Additional indirect taxes, higher oil and agricultural prices and wage increases were among the factors that could push inflation higher, the bank said.

The bank''s Governing Council would act "in a firm and timely manner" to keep inflation in check and "pay great attention to developments over the period to come," the bulletin said.

It repeated the ECB growth forecast of 2.5 per cent this year, compared with a previous forecast of 2.6 per cent, and 2.3 per cent next year, unchanged from its previous outlook.

While the US Federal Reserve was expected to lower its key interest rate to boost an economy hit by defaults on the high-risk market for mortgages, many analysts now expect the ECB to refrain from raising its rates further until early 2008 at least.

also see : General reports on Economy

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European Central Bank sees inflation threat as Paulson says mortgage woes hurt US economy