ECB reduces euro-zone growth forecasts for 2007

The European Central Bank (ECB) has slightly reduced its growth forecasts for the euro- zone for this year, citing a probable rise in oil prices and tougher conditions in the credit markets, writes Una McCaffrey.

The bank left its projections for inflation unchanged, however, and left open the prospect of another rise in interest rates in the current cycle.

ECB president Jean-Claude Trichet said the bank had trimmed its euro-zone growth outlook by a 10th of a percentage point to 2.5 per cent.

"The risks to these projections for economic growth are judged to lie on the downside," Mr Trichet said. He was speaking after the governing council of the ECB decided to leave its key interest rate unchanged at 4 per cent.

He cited "the general uncertainty surrounding economic projections" and "the current volatility in the financial markets" among the reasons for the bank's position, which had been anticipated.

"These downside risks relate mainly to a potentially broader impact from the ongoing reappraisal of risk in financial markets, global imbalances and protectionist pressures, as well as further oil and commodity price rises," Mr Trichet added.

The latest ECB quarterly staff projections put the harmonised index of consumer prices for this year in a 1.9-2.1 per cent range, a narrower band than in June, but leaving the midpoint at 2 per cent.

Austin Hughes, chief economist with IIB Bank, said this indication that inflation could rise above the ECB's target of 2 per cent before the end of the year gave the bank "greater wriggle room" on interest rates.

"The [ ECB] governing council is of the view that risks to this outlook for price developments lie on the upside," Mr Trichet said.

"These upside risks include increases in indirect taxes beyond those anticipated thus far, and further increases in oil prices and prices for agricultural products."

Mr Trichet deliberately avoided describing the ECB's stance as one of "strong vigilance" on inflation risks, with the absence of the phrase convincing observers that the bank would not raise rates next month.

This led to an increase in euro-zone government bond prices, while stock markets edged higher too.

Sentiment was also boosted by the fresh injection of €42 billion in ECB funds into the overnight money market.

The ECB said yesterday that it would hold an extra tender to add funds to the three-month interbank market, which has been badly hit by banks' increased risk aversion, to take place on September 12th. - (Additional reporting: Reuters)