Eurozone economic growth will slow slightly next year, European Central Bank officials said, while stressing they will still keep a close eye on inflation.
Their comments reinforced market expectations of a December increase in the main ECB interest rate to 3.5 percent, but gave no guidance on the bank's intentions for 2007.
ECB Governing Council member Nout Wellink said growth would fall in 2007 to around its potential rate, which economists estimate is around 2 percent. Currently growth is likely to match the 2.7 percent annual rate recorded in the second quarter, the best in six years.
"(The economy is) on a strong growth path at the moment," Wellink told Bloomberg news agency on Friday, in remarks that were published on Monday.Growth in 2007 "will still be in line with what we call potential" after a "slight slowdown", he said. In Helsinki, ECB Executive Board member Gertrude Tumpel-Gugerell said on Monday that the economy was on track to grow "as expected" next year. "There are no new developments," she told reporters.
ECB staff forecast the eurozone economy will grow around 2.5 percent this year, its fastest pace since the 2000 dotcom boom, and slow to about 2.1 percent in 2007.
Uncertainty about the effect of a cooling US economy, a rise in German value-added tax and oil prices has made it hard for economists to forecast the outlook for next year.
ECB President Jean-Claude Trichet said he would keep an eye on prices, saying headline inflation in the euro area has been at high levels for some time, despite a September retreat.
"That is why ... the ECB will continue to monitor very closely all developments so as to ensure price stability over the medium to longer term," he said in a letter to a member of the European Parliament, dated October 13 and released on the Economic and Monetary Affairs Committee's website.
With this language, Trichet has already signalled the ECB is likely to raise its key rate in December to 3.5 percent, in what would be its sixth quarter percentage point rise in 12 months. But markets are split about what the ECB will do next year.
ECB Governing Council members have clearly not made up their minds either. Wellink said it was too early to comment on 2007 and any rate decisions would be made "on the basis of incoming data", echoing comments by fellow Council member John Hurley last week. Similarly, Klaus Liebscher of Austria said last week that December forecasts would be critical.
But Wellink did say that for now there was "every reason to stay alert". "The real interest rate in a historic perspective is still very low," he said. "(The economy is) gradually reaching full capacity, which will of course somewhat increase pressure on wages and prices."
Headline inflation in September was 1.7 percent, in line with the ECB's target of keeping the rate below, but close to 2 percent. But a sharp drop in oil prices was the main reason for the low rate. Inflation is still expected to average 2.4 percent this year. Trichet said a sustained pickup in oil prices plus increases in indirect taxes and government-controlled prices are the main reasons why inflation has been higher recently.
To achieve price stability, monetary policy must ensure that these "first-round" price increases do not fuel inflationary expectations and become embedded in the cost structure, so called second-round effects, he said in the letter to European Parliamentarian Robert Kilroy-Silk of Britain.
"It is decisive that the Governing Council avoids the emergence of second-round effects and monitors closely the anchoring of inflation expectations as well as developments in the wage formation process," Trichet said.
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