The European Central Bank sees ongoing short-term inflation risks, its monthly report showed today, a week after the bank increased interest rates for the euro zone by a quarter percentage point to 2.25%.
'Recent price developments have led to a deterioration in the short-term outlook for overall inflation,' the bank said in its report for December. 'It is likely that annual inflation rates will remain elevated over the next few months.'
The comments came after IMF chief economist Raghuram Rajan urged the ECB to wait for evidence that an economic recovery in the euro zone had taken hold before raising interest rates further.
However, in an interview with weekly publication Rheinische Merkur, the chief economist at the European Central Bank Otmar Issing said the decision to raise interest rates by a quarter of a point last Thursday 'must not be seen as a stage' in an series of rate rises.
In its monthly report, the ECB also said its projections for inflation for the next two years remain subject to developments in the oil market, the pass-through of higher oil prices to consumers, as well as possible wage, indirect tax and other price increases.
The ECB has forecast inflation of 2.2% on average this year, 2.1% next year and 2% in 2007 - all the figures are above the ECB's medium-term inflation target of close to but below 2%. 'The projections are subject to upside risks,' the report said.
The Frankfurt-based bank also highlighted growth in the money supply, a key measure used to evaluate future inflationary pressures. 'Over recent months monetary growth has generally continued the upward trend observed since the middle of 2004,' the report said.
The money supply increased by 8% in the third quarter compared with the same quarter of 2004 and by 7.1% in the second quarter compared with the second quarter of 2004. The ECB said that the month-on-month increase in the money supply in October had slowed slightly.
