The European Central Bank said today that it would be 'particularly vigilant' with regard to possible inflationary dangers in the euro zone arising from high oil prices.
'At present, particular vigilance with regard to upside risks to price stability is warranted,' the guardian of the euro wrote in its September monthly bulletin published today.
'Medium-term domestic inflationary pressures still remain contained in the euro area. However, the balance of risks to the baseline inflation scenario is tilted to the upside,' as a result of runaway oil prices, the ECB warned.
The ECB expects inflation to remain around its present level of 2.1% over the next few months and is currently forecasting that it will average 1.9% next year. But the bank cautioned that upside risks dominated the inflation outlook.
Recent surveys have suggested that economic growth looks likely to improve in the second half of this year, but the oil price rise was also weighing on demand and confidence and therefore represented a downside risk to the growth outlook, the ECB said.
The central bank said that the current level of interest rates in the 12-country euro zone was 'extremely low' but appropriate, given the present inflation outlook. The ECB has held its central 'refi' refinaning rate steady at 2% since June 2003 and left them unchanged again at its regular monthly policy-setting meeting last week.
The wording of the September monthly report matches almost exactly the comments made by ECB president Jean-Claude Trichet at the news conference held after that meeting.
