The euro zone is likely to reach its two to 2.5 per cent trend growth rate next year, while inflation will subside, European Central Bank chief economist Mr Otmar Issing said in an interview today.
Asked whether recovery in the currency zone was strong enough for the bloc to reach its cruising speed next year, Mr Issing told Germany's Boersen-Zeitung: "There are many signs pointing in that direction."
Mr Issing also repeated the ECB's view that inflation would drop below its self-imposed 2 per cent upper tolerance ceiling in 2005. But this year, it would remain above that limit.
"Our estimate is that inflation will most likely remain above 2 per cent in the second half and on average in 2004, but that it will drop below 2 per cent in the course of next year," Mr Issing said in the interview released ahead of publication.
The ECB left interest rates unchanged at a record low of 2 per cent earlier this month. Financial markets expect the central bank's next policy move to be up, though analysts do not expect a first tightening before the first quarter of next year.
Inflation remained well above the ECB's 2 per cent threshold in June, inching down to 2.4 per cent from 2.5 per cent in May. Economic recovery is now under way, with output in the 12-nations in the bloc expanding 2.3 per cent on a seasonally adjusted annual rate in the first quarter of the year.
Mr Issing mentioned two risks to inflation. The central bank is closely monitoring rising inflationary expectations in financial markets, he said. There is also too much liquidity in the currency bloc, which could boost inflation if it did not subside along with economic recovery.
Asked about euro zone recovery, Mr Issing said Germany is Europe's weakest link. He noted that it was marred by weak consumption and that its economy needed structural reform to overcome fundamental weakness.