The focus of the European Central Bank's Governing Council is and will remain on price stability, council member Mario Draghi said on Saturday. The Bank of Italy governor's comments to a forex conference in the city of Bari came as pressure looks likely to mount for the ECB to cut interest rates to counter cooling growth. At the same time, inflation is set to stay high.
"Price stability has been maintained in recent years and will be maintained in the future," Draghi said. "The decisions of the ECB governing council, especially regarding interest rates, are and will remain focused on this objective."
Markets expect the US Federal Reserve to slash its funds rate later this month, piling pressure on the ECB. But Draghi's words that "inflation causes insidious, serious and lasting damage", with central banks "duty-bound to act promptly and resolutely" echoed the hawkish tone adopted by ECB President Jean-Claude Trichet at the latest meeting.
Inflation showed a "clear upward trend" in Europe at the end of 2007 and average inflation for the eurozone this year is expected to be 2.5 percent, "well above" the 2 percent ceiling set by the ECB, Draghi said. "It is not expected to come down to this value until 2009," he said.
Economists polled by Reuters agree with that forecast, but they also see eurozone growth cooling to 1.8 percent in 2008, down from 1.9 percent predicted last month, 2.0 percent forecast in November, and the 2.6 percent growth expected for 2007.
Draghi spoke of the emerging prospect of 2008 being a year "of financial turmoil coupled with cyclical weakness", but added that the anchoring of inflation expectations had been the base for employment growth in the eurozone and had to be preserved.
Echoing concerns about potential second-round effects of recent price increases on salaries voiced by other ECB members, Draghi stressed the importance that wage deals and profit margins reflect firmly anchored inflation expectations. In December, annual inflation in the eurozone stood at 3.1 percent due to high energy and food prices, whose combined weight within the price basket is nearly 30 percent.
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