PARIS (MNI) – There is some concern among ECB policymakers about a
recent rise in price stability risks, but Eurozone inflation is still
subdued and there is no reason to signal any change in the central
bank’s ultra-loose monetary policy — especially with the crisis in
Greece still on the boil — well-placed monetary sources told Market
News International.

Despite strong recent macroeconomic data, particularly in German
and French sentiment indicators, the overall Eurozone recovery is still
slow and uncertain, these sources said. Interest rates will need to stay
low for quite a protracted period, they said — though not necessarily
at 1% the whole time.

“There is concern over an uptick in inflationary risks, but there
is also another reason behind it,” said a senior Eurosystem official.
“We are concerned about the impact of the fiscal situation on inflation.
Our recent data show that debt in most countries will be much higher and
last for a longer period than what is officially estimated.”

However, he added: “It does not mean we are signaling a tightening
bias. It is very early to draw safe conclusions, and interest rates
remain at appropriate levels. We should be able to draw safer
conclusions after the first half of this year.”

The senior official continued: “Recent data in Germany in France
show there is momentum for a recovery which is encouraging, but still
there are too many imbalances among the Eurozone countries to be certain
about a concrete, all-around recovery.”

His comments were echoed by another well-placed central banking
source who said that despite the “surprisingly good” recent economic
indicators, “the overall picture is one of subdued growth.”

On the price stability front, “almost all the indicators are still
showing inflation expectations are subdued,” this official said. “I
don’t think it’s an issue at the moment.”

However, like the senior Eurosystem official, this source did fret
that, “the deficit and borrowing situation is much more of an immediate
worry. That may have longer-term price implications.”

But for now, he said, “any significant tightening in the short term
is unlikely. The markets’ stance on this looks to be about right.”

A third Eurozone central banker concurred with that view,
predicting that “rates will stay low for a long, long time.” However,
“that doesn’t mean they would have to stay at 1%,” he added. “Maybe they
could rise at some stage to, say, 1.5%. You could see the pressures
being there to do that at some point.”

This official agreed that “inflation is not an immediate problem.”
With wage settlements remaining moderate and productivity gains more or
less keeping up with them, labor unit costs are unlikely to increase by
more than 1% this year, he said.

“There’s no boom, and I can’t see inflation spiking — certainly
not until GDP picks up more aggressively,” he said.

–Paris newsroom, _331-42-71-55-40; paris@marketnews.com

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