The president of the European Central Bank (ECB), Mr Wim Duisenberg, has warned that inflation in the euro zone will be higher than expected this year. But he gave no hint of whether the ECB's governing council would move on interest rates when it met in Frankfurt next week.
Addressing the European Parliament's Economic and Monetary Affairs Committee in Brussels, Mr Duisenberg said recent developments had created a more uncertain outlook on inflation.
"At present, partly as a result of higher oil prices, inflation rates during 2002 as a whole could turn out to be somewhat higher than we expected at the end of last year. For price stability to be maintained, it is essential that past upward shocks to inflation rates remain of a one-off nature and do not become entrenched in the expectations of economic agents," he said. But the ECB president stepped back from hinting that a rise in interest rates was imminent, while making it clear that the Bank would act if necessary.
"While we have to acknowledge that monetary policy cannot affect inflation developments over the short term, we are determined not to put our achievements at risk," he said.
Mr Duisenberg identified the rise in services prices as a cause for concern but said the key to keeping inflation low was in keeping wages down.
"Prospects for price stability depend largely on wage moderation. It is a mistake to believe that high wage rises per se will increase aggregate demand in real terms. On the contrary, excessive wage claims will increase costs and create inflationary pressures. By doing so, they risk reducing competitiveness, employment growth, and thus consumption," he said.
Mr Duisenberg said the ECB was now certain that the recovery of the euro-zone's economy was under way. But he urged member-state governments to introduce more flexibility in labour markets, a measure he believed would boost economic growth. He also warned governments that they must respect the Stability and Growth pact that governed the euro.
"Let me strongly emphasise that all the member-states concerned must honour the commitments made to achieving balanced budgets by 2003-2004. Moreover, governments should pursue ambitious reforms with regard to the size and structure of public expenditure and revenue, also in order to create room for further tax cuts and to absorb the fiscal costs of population ageing," he said.
The euro lost ground against the dollar yesterday, falling to $0.9192 from $0.9210 on Monday.
