Inflation in the eurozone is likely to fall from current record highs as the economy slows, but the European Central Bank needs to be on guard because upside price risks are high, the IMF said on Monday. In an update to its report on the 15-nation single currency area.
The International Monetary Fund kept its growth forecast at 1.7 percent for 2008 and 1.2 percent for 2009, compared with 2.6 percent in 2007. "With the economy slowing down, and provided food and energy prices stabilise, inflation should fall appreciably from its current levels, although risks are high," it said in a statement. Some IMF directors believe the ECB should keep its interest rates on hold while others stress the bank needs to be vigilant on price growth, especially if wage settlements suggest accelerating labour costs in 2009, it said.
At the moment, underlying inflation and labour costs seem to be well contained, testifying to the ECB's "high credibility", but risks of second-round inflationary effects exist. The central bank raised its main interest rate in early July to 4.25 percent from 4.0 percent after inflation reached 4.0 percent year-on-year in June, more than double the ECB target. Price growth accelerated to 4.1 percent in July.The ECB is widely expected to leave borrowing costs unchanged when it meets on Thursday following data pointing to a sharp slowdown in the eurozone.
The IMF said eurozone growth is dragged down by high energy and food prices, tight credit conditions, slowing global demand and a strong euro. "They (IMF directors) also noted that the euro is now on the strong side relative to fundamentals," the IMF said, following complaints of many European businesses that the euro's strength against the US dollar is harming them.-
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