ECB urges Republic to take action to combat inflation

The European Central Bank (ECB) has urged the Government to take remedial action to curb inflation, which is currently running at three times the European average. In a thinly veiled reference to the Republic, the bank said yesterday that in countries where there is a risk of economic overheating, governments should control expenditure.

The Minister for Finance, Mr McCreevy, has consistently said he does not favour taking any action to try to combat inflation, which he hopes will come down in the second half of this year. Mr McCreevy has also indicated that he plans to continue cutting tax in his next budget. "While tax reforms are welcome, more emphasis should be given to structural reform on the expenditure side of budgets, leading to strict expenditure restraint," the Central Bank said in its monthly bulletin for June, published on Thursday.

"This is particularly important in those countries where there is a risk of overheating," said the bank, in what was seen as a reference to the Republic. If inflation does moderate later in the year, as Mr McCreevy anticipates, the annual rate is still likely to be in excess of 4 per cent. This is more than double the euro-zone average, which the ECB said yesterday was heading towards 2 per cent.

The bank also forecast strong economic growth across the 11-state euro zone.

It said there was a consensus among international institutions and private sector forecasters that gross domestic product growth would be well above 3 per cent this year and somewhat above 3 per cent in 2001. The Republic will grow by substantially more than this amount, with many commentators saying it could grow by almost 10 per cent. "The biggest downside risk to growth still appears to be linked to the possibility of a pronounced slowdown in the US economy and the ensuing negative effects on the growth of the world economy," the ECB said.

The June report indicated that the ECB was still concerned about the euro's low external exchange rate. "In an environment of strong growth and increasing capacity utilisation, the pass-through of exchange rate changes via import prices into consumer prices is facilitated," it said.