The euro zone economic recovery is slowly broadening with little evidence of strong underlying inflationary pressures, European Central Bank President Mr Jean-Claude Trichet said today, slightly easing the threat of an ECB poised to raise interest rates soon.
Mr Trichet said the ECB sees economic risks as broadly balanced, indicating that it is ready to be patient before joining the US Federal Reserve in ending years of cheap money.
But he left little doubt it stands ready to act if surging oil creates broad upward price pressure. "The Governing Council is still very vigilant about any development which might involve risks to price stability in the short, medium term," Mr Trichet said in a testimony before the European Parliament's Economic and Monetary Affairs Committee.
A leap in oil prices and tax increases have pushed euro zone inflation above the ECB's 2 per cent ceiling in recent months.
"Nonetheless, there is little evidence as yet of stronger underlying inflationary pressures building up domestically," Mr Trichet said.
Moreover he repeated several times that the ECB expects economic growth - which has largely relied on exports - to broaden and strengthen into 2005.
While he acknowledged risks that growth might be less than predicted, he said recent data confirm expectations of a steady recovery.
Mr Trichet said the euro zone rebound has maintained its momentum and the conditions for recovery remained in place. Higher corporate profitability and the low level of interest rates should support business investment, which will lead to job growth and promote stronger domestic consumption, Mr Trichet said.
Inflation is seen easing in 2005 to 1.8 per cent after hitting 2.3 per cent in August. However, data are mixed.
French consumer spending has slowed sharply from a rapid pace in the first half of this year. Figures released today showed it grew 0.5 per cent in August after falling 2.9 per cent in July. German investor confidence also slipped to a 15-month low to 38.4 in September from 45.3 in August.
Economists say the patchy data show how surging oil prices, up over 30 per cent this year, and a slowing of rapid global growth is taking some shine off the euro zone.
It is too early to tell how successfully the 12-nation area can ride through the soft patch, they say. Mr Trichet stressed that the ECB was "very pragmatic" and would watch the incoming data carefully.