Hurley says ECB wary of euro-zone inflation

CENTRAL BANK governor John Hurley says risks to economic growth in the euro zone remain "on the downside" but indicated the European Central Bank (ECB) remained wary of inflationary pressures over the medium term.

Mr Hurley, who sits on the ECB's interest-rate setting governing council, last night told the annual dinner of the Irish Association of Pension Funds in Dublin: "It is clear that the risks to the outlook for economic activity in the euro area lie on the downside. However, risks to price stability over the medium term are on the upside."

He added that while recent data supported this dichotomy, new macroeconomic projections by the ECB ahead of the council's next meeting in March could yet alter this picture.

Mr Hurley's comments mirror those by German Bundesbank president Axel Weber on Wednesday. An influential member of the ECB's governing council, Prof Weber said market expectations about future interest rate moves by the ECB underestimated inflation risks across the euro zone. The ECB has held its key interest rate steady at 4 per cent throughout the current credit crunch.

Turning to the Irish economy, Mr Hurley warned against "trying to compensate ourselves for terms of trade losses, such as those caused by the oil price increases", emphasising that such a response had been damaging in the past.

"Policies that promote productivity and competitiveness can, on the other hand, help the economy to ride out the effects of adverse developments and of lower growth in the global economy."

Mr Hurley also posed the possibility of tax incentives or direct government contributions as a means of addressing future pension expenditure pressures in addition to those outlined in the government's pensions Green Paper published last summer.

He said the Republic had the advantage of one of the lowest debt-to-GDP ratios in the EU and a demographic profile that would "remain favourable for some time". This represented a "window of opportunity" to put the Republic's pension framework on a "sustainable" footing, Mr Hurley said.