2008-03-07 EU Highlights

European News Highlights:

ECB’s Weber Sees `Little’ Room to Cut Interest Rates

rising MNOG (minimum noninflationary output gap) as inflation rises at current levels of GDP. (see below.)

ECB’s Noyer Says Globalization Has `Ceased’ to Curb Inflation

import prices are rising there even with the strong euro, implying if the euro wasn’t as strong import prices would be that much higher.

Euro Strength Reduces ECB’s Surplus

US beggar thy neighbor policy is robbing demand from the eurozone

German Industrial Output Rises, Led by Construction
Italian Light Commercial Vehicle Sales Climb 14% in February

If GDP holds up with inflation this high and rising, the ECB then has to engineer a larger output gap.

ECB’s Weber Sees `Little’ Room to Cut Interest Rates

by Simone Meier and Gabi Thesing
(Bloomberg) European Central Bank council member Axel Weber said the bank has little room to lower interest rates with the economy operating near full capacity and oil prices at a record.

“The output gap is such that it doesn’t give me a lot of comfort that it will lead to a strong disinflationary effect in the period to come,” Weber told reporters in Oslo today. Coupled with external price shocks such as surging oil and food prices, “there is very little room to maneuver.”

The ECB yesterday kept its main lending rate at a six-year high of 4 percent to curb inflation even as the euro’s appreciation and slower U.S. expansion threaten to curb economic growth. Weber said today that there’s an “unusual amount of uncertainty” on both the outlook for growth and inflation.

“The current policy stance in the euro area has to be judged as contributing to achieving our medium-term objective of price stability,” Weber said. “Weaker growth prospects do not pose sufficient reason to expect a damping of inflationary pressures in the foreseeable future.”

The ECB yesterday revised up its inflation forecast for this year to about 2.9 percent, which would be the highest annual average rate since 1993, according to International Monetary Fund figures. The bank also predicted inflation would average about 2.1 percent in 2009, breaching its 2 percent limit for a 10th year.

“Due to increases in unit wage costs, core inflation rates are projected to equally exceed the 2 percent margin over the course of 2008,” Weber, who is also president of Germany’s Bundesbank, said. “And even taking into account a forecast horizon beyond 2008 gives no sign for relief.”

Weber said the bank will “do what is necessary” to quell inflation risks.

Economic growth in the 15-nation euro region will show a “gradual recovery toward potential rates” of around 2 percent in the second half of 2008, he said.

And, of course, that’s a bad thing when inflation is too high to begin with.