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EU finance ministers say euro-area inflation outlook improving

European finance ministers said they are optimistic about the inflation outlook for the 13-nation euro region, suggesting they see limited scope for further interest-rate increases.

„There are plenty of risks that persist but today it seems that the risks are more balanced,” Luxembourg Finance Minister Jean-Claude Juncker said in Brussels after chairing a meeting of his counterparts from the euro area yesterday. Spain's Pedro Solbes said „inflation is improving all over Europe.” The euro region's inflation outlook for 2007 may hinge on the outcome of a wage round in Germany, Europe's largest economy, which is scheduled to start next month. While the IG Metall labor union is demanding a pay increase for its members that is more than three times the rate of inflation, finance ministers today sounded comfortable about the likely outcome. An internal European Commission report discussed at the meeting argues that rising labor costs in the euro region pose no „imminent danger” to inflation. That presents a more relaxed outlook than that of European Central Bank President Jean-Claude Trichet, who is preparing to raise borrowing costs next week for the seventh time since late 2005. Trichet said February 8 that „stronger than currently expected wage developments pose substantial upward risks to price stability.” Trichet, who also attended yesterday's meeting, declined to comment to reporters as he arrived. The ECB's benchmark rate currently stands at 3.5%.

In the confidential report obtained by Bloomberg News, the commission says that „inflationary pressures stemming from the labor market remain subdued.” Increases in productivity and the supply of workers will curb labor-cost gains even with unemployment at 7.5%, the lowest since records began in 1993, according to the report. „I see no inflation risk as long as wage policy in Europe is based on productivity,” German Finance Minister Peer Steinbrueck said yesterday in Brussels. Risks to price stability in Europe have eased after a 20% decline in the price of oil in the past seven months and an increase in German sales tax failed to spur inflation as much as some economists had forecast. Consumer prices in the euro region rose 1.9% in January from a year earlier, the fifth month that inflation was below the ECB's 2% limit.

Juncker, who also is Luxembourg's prime minister, led officials in expressing optimism about the euro region's growth prospects. The European Commission on Feb. 16 raised its forecast for economic growth this year to 2.4% from its previous projection of 2.1%. It also cut its inflation forecast to 1.8% from 2.1% previously. „The outlook for growth in the euro zone and the European Union is positive,” said Austria's Wilhelm Molterer after the meeting. Finance ministers declined to comment directly on the yen's drop to a record low against the euro last week. Juncker said he is sticking to his comments at this month's meeting of officials from the G-7 nations in Essen, Germany, warning about one-way bets against currencies. „Trichet and I were right to warn against betting too much on things definitely developing in one direction,” Juncker said yesterday. Ministers and central bankers from the G-7 nations urged investors in a statement published February 10 to recognize that Japan's economic recovery is „on track,” stopping short of labeling the yen's decline as a threat to global growth. Against the euro, the yen fell as low as 159.65 on February 23 even after the Bank of Japan raised its benchmark lending rate to 0.5% two days earlier. (Bloomberg)