Prices will likely rise more this year owing to higher costs for energy products and other commodities that caused a sharp increase in consumer inflation expectations in the European Commission's latest sentiment survey."Inflation is gradually turning into an issue for consumers and for industry," Berenberg Bank chief economist Holger Schmieding noted.
ECB president Jean-Claude Trichet has said that the ECB was watching the situation carefully but that price increases should moderate later this year, a view backed by the latest money supply and credit data.ECB executive board member Lorenzo Bini Smaghi nonetheless warned Thursday that "imported inflation can no longer be ignored," a reference to pressure from higher energy and food prices.
Economists feel the bank could raise interest rates if necessary later this year to keep inflation at bay despite the eurozone debt crisis.They expect the ECB to maintain its main rate at 1.0 percent on Thursday however, marking 22 consecutive months at that record low level.
An interest rate hike now would hobble Greece, Ireland and Portugal as they struggle with weak economies and difficult debt issues.It would also come as the EU Commission survey suggested an end to improving economic momentum, with its confidence indicator sliding to a five-month low in January.
International Monetary Fund economist Olivier Blanchard said it will take years for European job markets to recover completely from the global economic crisis.Although Europe has probably stopped shedding jobs, forecast growth of 2.5 percent for the world's advanced economies for 2011 and 2012 means unemployment would persist for the next two years, Blanchard warned.
For Commerzbank economist Christoph Weil, "the key question is: For how long the ECB will take the situation in the crisis countries into account and leave its key rates at the current, very low level?"In Germany, inflation hit a provisional 1.9 percent in January, the highest level in more than two years and a sign that ECB monetary policy might not be appropriate for its economic engine much longer.
Eurozone inflation data is due out Monday, and "probably accelerated to 2.3 percent, clearly above the ECB target," UniCredit economist Nikolaus Keis said.Central bank governors can take some comfort however in the results of a bond auction last week that might mark a turning point in the debt crisis.
A temporary eurozone aid scheme, the European Financial Stability Facility pulled off its first five-year bond auction worth five billion euros ($6.8 billion) to raise funds for Ireland and calm financial markets.
"It may well be a turning point" in the crisis, EFSF head Klaus Regling said after demand surged to almost nine times greater than what was on offer, with investors worldwide leaping at the chance to buy the top-rated bonds.
Clients, including many in China and Japan, were signed up in a blistering 15 minutes with "record breaking" bids totalling 44.5 billion euros, an EFSF statement said.Trichet has said the EFSF should be given more flexibility and allowed to buy eurozone government bonds, a role currently held reluctantly by the ECB.French Finance Minister Christine Lagarde confirmed Friday in Davos, Switzerland that European leaders were discussing that possibility.