THE EUROPEAN Central Bank is reviewing its assessment of inflation amid a slowdown in growth within the 17-state euro zone.

ECB president Jean-Claude Trichet told an extraordinary meeting of the European Parliament’s economic and monetary affairs committee in Brussels yesterday that “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”.

The comment contrasts with Mr Trichet’s last policy statement on August 4th, when he said risks to the inflation outlook were “on the upside”.

His comments came as EU economic and monetary affairs commissioner Olli Rehn told the same committee he was “seriously concerned” that financial turbulence could spill over into the broader economy and signalled the EU may cut its 2011 growth forecast.

He said “short-term growth prospects have somewhat worsened compared to our spring forecast” in May, when the European Commission estimated a euro-area expansion of 1.6 per cent this year and 1.8 per cent in 2012.

The region’s growth slowed to 0.2 per cent in the second quarter, from 0.8 per cent in the first, its worst showing since emerging from recession in 2009 – with the German economy almost grinding to a halt – as Europe’s debt crisis roiled financial markets and weighed on confidence.

Mr Rehn joined Germany and Spain in rebuffing the International Monetary Fund’s new managing director, Christine Lagarde’s call for an “urgent”, potentially mandatory, recapitalisation of Europe’s banks.

“EU banks are significantly better capitalised now than they were one year ago,” Mr Rehn said.

Ms Lagarde, speaking at an annual meeting of central bankers in Wyoming in the US on Saturday, urged politicians to “act now” or risk seeing the fragile recovery derailed.

“Banks need urgent recapitalisation,” Ms Lagarde said. “The most efficient solution would be mandatory substantial recapitalisation – seeking private resources first, but using public funds if necessary.”

The former French finance minister did not elaborate.

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 per cent, is unlikely to increase it again until 2013, Citigroup economists said last week.

Mr Trichet’s comments were the clearest indication yet that the recent steep growth slowdown across the euro zone, as well as financial market turbulence, could result in a significantly more cautious monetary policy stance from next month.

With euro zone inflation above the ECB’s target of an annual rate “below but close” to 2 per cent, euro zone official interest rates were raised in April and again in July. The bank’s governing council will consider the issue once again at a meeting next week.

“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.”

Addressing the contentious issue of eurobonds, Mr Rehn said euro-zone countries needed to have a “substantive debate” before embarking on any effort to issue joint euro bonds.

"There are currently rather high expectations on how euro bonds could help solve the debt crisis," he said. Such bonds would need to be accompanied by oversight measures that would "have unavoidable implications for fiscal sovereignty". – ( Bloomberg/Copyright The Financial Times Ltd 2011)