EU commission says inflation will stay above 2%

THE EUROPEAN Commission warned yesterday that euro zone inflation will remain above the 2 per cent European Central Bank (ECB) target as concern over the unrest in the Arab world pushed oil prices above $114 a barrel.

In an interim forecast which takes account of conditions in the seven largest European countries, the commission said the EU’s economic recovery was gaining ground but warned that the fragile state of financial markets remains a concern. “Despite the recent relative calm in the financial markets, the situation has not yet fully normalised,” economics commissioner Olli Rehn told reporters in Brussels.

Although the forecast said tensions in some market segments were easing, it warned that inflation risks were “somewhat tilted to the upside” due to the turmoil in North Africa and the Middle East.

The price of a barrel of Brent crude oil rose $2.31 to $114.11, reflecting anxiety about supply disruptions due to uprising against the Gadafy regime in Libya.

Oil prices are up 15 per cent since mid-February and pressure on other commodities, such as food, is stoking inflation concerns. However, confidence about the “robust” German recovery led Mr Rehn to upgrade his euro zone GDP growth forecast for 2011 to 1.6 per cent from 1.5 per cent.

Although this forecast was predicated on oil at $102 per barrel, Mr Rehn dismissed the suggestion that higher oil prices could push Europe back into recession.

“Yes, it has an impact but, at these oil prices, the impact is still relatively limited,” he said. “We are not, for very good and realistic reasons, forecasting any double dip recession.”

The commission increased its euro zone inflation forecast to 2.2 per cent from 1.8 per cent but added it expected a gradual decrease towards 2 per cent by the end of the year. Mr Rehn said core inflation – which excludes oil – remains low.

The forecast came before the ECB’s monthly rate-setting meeting tomorrow, at which its governing council may harden its rhetoric on inflation. The bank has kept its core interest rate at a record low of 1 per cent for almost two years but analysts say rising commodity prices will lead its policymakers to bring forward their next rate rise to the autumn.