ECB says recovery on track despite oil risk


The European Central Bank said today high oil prices could lead to slightly higher inflation than predicted earlier this year while keeping its assessment the euro zone economy was recovering.

The recent jump in oil prices contributed to uncertainty about how strong and quick the recovery would be, although there was growing evidence the euro area would pick up this year, the bank said in its April monthly bulletin.

Analysts said the report confirmed the ECB was still in wait-and-see mode and it would still be some time before it started lifting rates.

Oil prices rose above $27 a barrel on fears of rising violence between Israel and the Palestinians. Economists warn persistently high oil prices could choke the fragile economic recovery.

Euro zone inflation, at 2.5 per cent in March, would still drop below the bank's two per cent tolerance level in coming months, the ECB said, but the decline might be less pronounced than previously expected due to costly oil.

Still, given that the economy started to recover at a modest pace after reaching a trough at the end of last year, there was little pressure on prices from domestic demand, the ECB said.

Moderate wages were key for the inflation outlook, the bank said, adding that current wage negotiations were a reason for concern.

The recovery would get a shot in the arm as companies had now stopped running down inventories, and an expected decline in inflation should add to consumers' disposable incomes, the ECB said. It repeated that euro zone financing conditions remained favourable.

The strengthening global economy would also help by stimulating euro area exports, the ECB said.