POLL-Euro-zone inflation to hit ECB limit in May
By David Stamp
LONDON, June 16 (Reuters) - Euro-zone inflation will head back to the European Central Bank's 2.0 percent limit when data for May is released next week, economists forecast, confounding expectations that it would fall gently the rest of this year.
A new surge in oil prices is definitely a culprit but economists disagree on whether it will be the sole reason for a rebound in the figure, to be released at 1000 GMT on Monday.
In a Reuters poll of 22 economists, the median forecast for the Harmonised Index of Consumer Prices was bang on 2.0 percent, up from a 1.9 percent rate in April. The range of forecasts was 1.8-2.2 percent.
Inflation, which the ECB and private sector economists alike had expected to fall steadily from a peak of 2.1 percent in March, is back on the agenda.
Last week the ECB cited the inflationary threat when it raised interest rates by at least 50 basis points. This week Spain reported inflation hit a 3-1/2 year high of 3.1 percent in May while the Irish rate reached a near 11-year peak of 5.2.
Apart from oil the ECB is worried by the inflation impact of two other factors which it cited again in its monthly report on Thursday. One is the revival of euro-zone economic growth and the other is the euro's exchange rate (EUR-), which remains historically weak despite a recent revival. A weak euro pushes up the cost of imports.
But Steve Andrew at Merrill Lynch in London said the overall euro-zone picture remained good. ``We don't think it's a harbinger of any problem on the underlying inflation outlook,'' he said. ``Outside of oil everything else is remaining pretty well behaved.''
From a euro-zone perspective, oil is anything but well behaved. After a sharp drop in late March and early April, Brent crude futures (LCOc1) jumped from a trough of just over $21 a barrel to about $29 at the end of May.
NOT THE SOLE CULPRIT
But Klaus Baader at Lehman Brothers in London, who also forecast 2.0 percent in May, said oil was not the sole culprit.
``Yes, energy prices again clearly did contribute to inflation. If you take them out of the year-on-year rate then you get sizeable differences,'' he said. ``(But) this is not at all just driven by energy prices.''
Core inflation excluding energy had risen in data already released in France and Spain. There were also strong signs the core rate was rising in the Netherlands, Ireland and Portugal.
Things aren't going to plan for the ECB and private economists. ``They were expecting that after the March peak inflation would decline smoothly and quite quickly. That's proving not to be the case at all,'' said Baader.
A May figure of 2.0 percent would take inflation back to where it was in February.
``Consumer inflation expectations have increased dramatically in the past year,'' Baader said. But those expectations had not passed into higher wage settlements. ``Quite frankly wage developments in Europe are remarkably subdued. In that sense the inflation potential is relatively mild,'' he said.
Another reason for not panicking is the ECB's sizeable rate increase last week. It moved from a fixed refinancing rate of 3.75 percent to a variable rate system with a 4.25 percent floor for bids at the weekly auctions starting on June 28.
Baader expected the minimum accepted rate to be yet higher at around 4.30-4.35 percent. ``The ECB raised 50 basis points plus,'' he said. ``When the repo is actually conducted it's going to rise by at least five basis points, if not 10.''
(Additional reporting by Danielle Gann)
04:56 06-16-00 |
