Recent positive signs confirm Europe's economy will recover this year, but inflation may end 2005 above 2 per cent, European Central Bank chief economist Otmar Issing said in a newspaper interview today.
High oil prices, which hit record peaks above $64 a barrel earlier today, would affect inflation more than growth, he said.
"A combination of positive signals is an encouraging aspect. It confirms a scenario that we presented in June - that of a recovery in the course of this year," Issing told Italian financial newspaper Il Sole 24 Ore. Soaring oil prices, though they look worryingly persistent, need not stand in the way of recovery, he added in an echo of the optimistic tone set last week by ECB President Jean-Claude Trichet who said the economy was heading in the right direction.
"Oil prices have an immediate and strong impact on inflation, whereas it is less strong and more delayed in terms of growth," Issing said.
James Carrick, a London-based economist with ABN AMRO, said the ECB's efforts to talk up evidence of growth might be the first step towards a more hawkish stance, but did not signal a fundamental shift from the current rates-on-hold strategy.
The central bank opted to keep rates at 2 per cent last week, unchanged for the 26th month in a row. On Thursday, it is due to release its monthly bulletin, providing the reasoning behind that decision.
Issing's comments on inflation support the view that the ECB will have to revise up the 2 per cent midpoint of its 2005 inflation forecast.
Improving economic data in recent weeks, however, suggest its forecast for real gross domestic product growth should remain in the 1.1-1.7 per cent range.
Most analysts believe the ECB will leave rates on hold until well into next year as it waits for firm evidence that the economy in the 12-nation zone, which hit a soft patch in the second quarter, is back on a firmer footing.