The European Central Bank has upgraded its forecast for economic growth in the 12-country euro zone amid signs that the nascent recovery in the single currency region is gathering pace.
ECB President Jean-Claude Trichet said the guardian of the euro was pencilling in growth of 2.1% in 2006 and 2% in 2007. Previously, the ECB had been forecasting growth of 1.9% both this year and next year.
'The evidence suggests that economic activity is improving,' Trichet said after the bank raised its key interest rates by a quarter of a percentage point for the second time in three months to 2.5%.
'We should see stronger growth rates over the short term,' the Frenchman said. 'And looking further ahead, the conditions remain in place for ongoing economic expansion in the euro area.' The external environment remained favourable, Trichet explained.
Investment was also expected to remain strong, benefiting from an extended period of very favourable financing conditions, corporate balance sheet restructuring and gains in earnings and business efficiency. Consumption growth 'should also strengthen gradually over time, in line with developments in real disposable income, as the labour market situation gradually improves,' he added.
As a result, the ECB was projecting economic growth in a range of 1.7-2.5%, or a midpoint of 2.1%, in 2006. Growth was expected to come out in a range of 1.5-2.5% or a midpoint of 2% in 2007.
The ECB also upgraded its forecast for inflation in the 12-country euro zone in both 2006 and 2007 in view of stubbornly high energy prices.
Trichet said the bank was pencilling in a median inflation rate of 2.2% for the single currency area both this year and next year. Previously, the ECB had been forecasting an average annual inflation rate of 2.1% in 2006 and 2% in 2007.
Annual inflation, as measured by the harmonised index of consumer prices (HICP), 'is projected to lie between 1.9-2.5% in 2006, and between 1.6-2.8% in 2007,' Trichet said after the ECB raised its key interest rates by a quarter of a percentage point for the second time in three months to 2.5%.
Meanwhile, Trichet also said that the quarter-point increase in euro zone interest rates announced by the Bank earlier today does not signal a long series of rate rises in coming months. 'We don't already have a plan ex-ante for future rate hikes,' Trichet said.
