The European Central Bank said today that it was on high alert with regards to inflationary pressures in the 12-country euro zone in face of runaway oil prices and excess liquidity in the economy.
'Strong vigilance is warranted with regard to upside risks to price stability,' the guardian of the euro currency wrote in its October monthly bulletin released today.
'Given the recent oil price developments, the short-term outlook for inflation has significantly deteriorated,' the ECB wrote.
Euro area-wide inflation, as measured by the harmonised index of consumer prices (HICP), 'could remain at its current elevated levels for the rest of 2005,' the bank warned. In September, euro zone inflation shot up to 2.5%, way above the ECB's ceiling of 2%.
'While no detailed information on the different components of HICP is available as yet, it appears that oil price increases have again played an important role,' the bank said. 'And there is currently no indication that oil prices will moderate significantly in the foreseeable future,' it added.
Nevertheless, 'for the time being, there continues to be no clear evidence of domestic inflationary pressures building up in the euro area. The main scenario therefore remains one of elevated inflation rates over the short term and with a gradual decline thereafter,' the ECB said.
The wording of the report matched exactly comments made by ECB president Jean-Claude Trichet last week and underlined the bank's concern about the possible inflationary effects of both oil prices and strong money supply growth.
The ECB closely monitors the money supply because it sees a link between the level of liquidity in the economy and future inflation. And the money supply has been growing much faster than the ECB would like for some time.
'Strong monetary and credit growth, in the context of an already ample liquidity situation, points to risks to price stability over the medium to longer horizons,' the bank warned in its report today.
At its rate-setting meeting last week, the ECB held its key interest rates steady at 2%, where they have been since June 2003. But ECB chief Trichet repeatedly raised a warning finger at the possible inflationary dangers, promising to remain 'strongly vigilant' about the risks to price stability and vowing to act to curb inflation if necessary.
