The euro zone's inflation outlook is relatively favourable and inflation should fall below 2 per cent in the coming months, European Central Bank governing council member Mr Jaime Caruana said.
The outlook for the euro zone economy was "somewhat more uncertain" following the slowdown in the second half of last year, although the recovery was expected to strengthen gradually in 2005, Mr Caruana, governor of the Bank of Spain, said in a speech yesterday evening.
...European Central Bank governing council member Mr Jaime Caruana
The text of his speech, given at a private event in memory of late ECB executive board member Eugenio Domingo Solans, was published on the Bank of Spain's website today.
"The current outlook on inflation is relatively favourable, since it suggests a return to year-on-year rates below 2 per cent in the coming months," Mr Caruana said.
"The outlook for activity in the euro zone is somewhat more uncertain, after the rough patch in the second half of 2004, although the recovery is expected to strengthen gradually in 2005," he said.
EU statistics office Eurostat said last week that euro zone GDP rose 0.2 per cent in the fourth quarter of 2004, half what analysts had forecast and weaker than the third quarter.
Mr Caruana said the Eurosystem's monetary policy strategy permitted short-term deviations from its inflation target, as had happened in the euro zone in recent months "since it thinks they are mainly due to transitory disturbances - such as that caused by higher oil prices - and therefore are consistent with a return to more moderate rates of price increases in future."
He said growth of monetary aggregates, which he said had been "unusually high" in recent years, should also be interpreted carefully to draw their possible implications for medium and long-term price trends.
These variables were sensitive to changes in economic players' preferences for liquid assets, he said.