ECB hikes inflation forecast, cuts growth projections (2nd Lead)

Jun 5, 2008, 12:56 GMT

Frankfurt - The European Central Bank raised its inflation forecasts and cut its economic growth projections after leaving interest rates unchanged Thursday in the face of surging consumer prices.

The ECB was in 'a state of heightened alertness' ECB chief Jean- Claude Trichet told his regular press conference adding that fighting inflation remained the bank's top priority and predicted that consumer prices would remain at a high level for a protracted period.

While the Frankfurt-based bank held its key rate at 4.0 per cent for the 12th month in a row, Trichet said the bank was raising its forecasts for inflation markedly to average 3.4 per cent in 2008 and 2.4 per cent in 2009.

While the ECB's 2008 average growth rate of 1.8 per cent is roughly in line with its previous projection, the currency's bloc expansion rate is predicted to slow to average 1.1 per cent next year.

The ECB staff projections released in March predicted that inflation in the eurozone would average 2.9 per cent this year and 2.1 per cent in 2009.

As expected, the Bank of England Thursday meeting in London also left interest rates unchanged at 5 per cent amid growing inflationary fears and gloomy economic data.

The decision to keep rates on hold marked a shift in the thinking of the policy-making Monetary Policy Committee (MCP) which had earlier in the year predicted a series of rate cuts. Fuelled by high energy and food prices, inflation in Britain jumped to 3 per cent in April.

Faced with a stream of indicators showing that the cost of living is rising far sharper than expected, the MCP opted for the 'middle way' of taking no action this month, analysts said.

The new ECB staff projections underscore the difficult balancing act facing the bank as it juggles growing inflation fears and the prospects of slowing economic growth the 15-member eurozone.

However, speaking at his press conference following Thursday meeting of the ECB's 21-head rate-setting council, Trichet warn again about the threat posed by resurgent inflation.

Data released last week showed inflation in jumping to a 16-year high of 3.6 per cent in May, which helped to drive consumer prices further away from the ECB's target of keeping inflation close to but just below 2 per cent.

Some economists are predicting that eurozone inflation will continue edging up towards 4.0 per cent in the coming months.

What is more, the renewed inflationary pressures have also helped to fuel market speculation that the ECB's next monetary move might a rate hike.

For the moment, however, many analysts have abandoned previous forecasts of an ECB push to trim its benchmark refinancing rate this year and are now expecting the bank to sit tight on monetary policy into 2009.

Despite signs of slowing global economic growth and resurgent inflation, the eurozone economy grew more than expected during the first quarter, data released Tuesday showed.

The eurozone economy grew by 0.8 per cent quarter-on- quarter during the first three months of the year, the European Union's statistics office said with rising investment and inventories resulting in an annual 2.2-per cent growth rate in the first quarter.

Economists had expected the data would show the eurozone economy growing by 0.7 per cent in the three months to the end of March.

However, economists expect the ripples from the financial crisis unleashed by the US mortgage market shakeout and growing inflation fears to result in eurozone growth slipping back a gear as the year unfolds.