The European Central Bank (ECB) has warned that high oil prices could wreck the economic recovery in the euro zone and fuel inflation. ECB president Mr Jean-Claude Trichet said it was too early to tell if the current high prices represented a "transitory" development or would be sustained for a longer period.
"The present levels of the price of oil will have a dampening impact on growth, if they persist... The responsibility of the ECB is, in any case, to prevent second-round effects, which would make higher inflation a permanent feature, which would prevent the delivery of price stability and which would hamper sustainable growth," he said.
Mr Trichet was speaking in Frankfurt after a meeting of the ECB's Governing Council left interest rates unchanged at 2 per cent.
He said that the euro-zone's economic recovery had strengthened in the past month and that, if economic growth continued at the level of the first quarter of 2004, it would average 2.4 per cent for the year.
"Looking ahead, the conditions for a continuation of the recovery remain in place. Economic growth outside the euro area continues to be strong and should promote export growth. On the domestic side, investment should benefit from the positive global environment as well as from the favourable financing conditions," he said.
Mr Trichet predicted that consumer spending would recover after the stagnation of 2003 but he warned that recent price rises brought with them the danger of a return of inflation.
"Recent oil price developments have created considerable upward pressure on consumer prices.
"According to Eurostat's flash estimate, annual HICP inflation was 2.5 per cent in May, partly due to base effects, after standing at 2 per cent in April. Markets expect oil prices to decline gradually from recent peaks.
"If they were to remain at their recent high levels, it is to be expected that inflation rates would continue to be higher than previously anticipated and stay above 2 per cent for longer than just a few months ahead," he said.
Mr Trichet made clear that, despite yesterday's decision to leave interest rates unchanged, the ECB was not ruling out an early change in rates.
"I can confirm that we in the governing council consider that we have all our options open, we have no bias and we are vigilant," he said.
The ECB president warned social partners against allowing high oil prices to push up wages and made clear that the ECB would take any action it deemed necessary to keep inflation down.
"We are responsible for price stability. The magnetic needle on our compass is price stability," he said.
Mr Trichet also criticised EU governments for their failure to impose budget discipline and the slow pace of structural reforms.
