The European Central Bank (ECB) today raised its forecast for euro zone inflation for 2004, while its outlook for an economic recovery to take hold next year remained unchanged.
But the central bank repeated that official interest rates were appropriate, given that inflation is still expected to drop below its two per cent tolerance ceiling next year.
Inflation was now seen between 1.3 per cent and 2.3 per cent on average next year, which gives a mid-point of 1.8 per cent. That is up from a range of 0.7 to 1.9 per cent forecast in June, or a mid-point of 1.3 per cent.
The updated projections for the harmonised index of consumer prices (HICP) made by ECB staff were published in the bank's December monthly bulletin.
"The main change to the projections . . . is an upward shift in the ranges projected for HICP in 2004. This is broadly explained by various planned fiscal measures, as contained in national budget plans," the ECB said in the bulletin.
Inflation would then drop to within a band of 1.0 per cent to 2.2 per cent, implying a 1.6 per cent mid-point, in 2005.
The ECB had already said that its June forecast for inflation was probably too low because of high oil and food prices and government tax increases.
The 2004 growth outlook remained unchanged in a 1.1 per cent to 2.1 per cent range, for a mid-point of 1.6 per cent, while growth in 2005 would further accelerate to a 1.9 per cent-2.9 per cent range, giving a mid-point of 2.4 per cent.
Faster global growth was seen boosting exports starting next year despite the stronger euro and would be a key driver for strengthening output, while domestic demand would also pick up as the labour market gradually started to improve, the ECB said.
The ECB in the bulletin's editorial section also repeated that its current monetary policy stance was appropriate as it saw little risk of inflation. The statement was an almost word-for-word repeat of last week's statement explaining why the ECB left its benchmark rate unchanged at 2.00 per cent.
The ECB's staff forecasts assume the three-month interbank rate at around 2.2 per cent and the euro to be at $1.17 to the end of the forecasting period. Oil is assumed to come down from $28.50 a barrel on average in 2003 to $24.50 a barrel in 2005.