European Central Bank President Jean-Claude Trichet, testifying to a Brussels Parliament committee, has reiterated that euro zone interest rates remain appropriate.
He said he is not preparing the market for any move from their current 2%, with high oil prices weakening the prospects for growth: Trichet told the European Parliament economic and monetary affairs committee: “We have produced our most recent ECB staff projections, which envisage euro area real GDP growing at rates of between 1.0% and 1.6% in 2005 and between 1.3% and 2.3% in 2006. Compared with the June projections, the ranges projected for real GDP growth have been adjusted slightly downwards. For 2005, this mainly reflects slight downward revisions of past data, while for 2006 this reflects the projected effects on disposable income of increases in oil prices.”
With the cost of crude oil up by 60% in the past year, Trichet said the ECB is watching the effect on prices and inflation, but so far there are no signs of so called “second-round” inflationary effects, that is where companies raise prices and workers demand higher wages to compensate for increased energy costs.