European Central Bank Governing Council member Ewald Nowotny said ECB will lower its forecast for the euro area’s economic developments in 2012 and 2013 when it publishes estimates next week.
“There won’t be an improvement, but more of a worsening of expectations,” Nowotny told reporters in Alpbach, Austria, late yesterday. “The differences in growth rates between the North and the South will unfortunately increase -- we are expecting negative growth, a retraction in all Southern countries for 2012 and a stagnation in France.”
The ECB is due to announce its quarterly economic forecast on Sept. 6. In June it forecast a 0.1 percent economic contraction in the euro area this year, unchanged from a March estimate, while it lowered its prediction for 2013 growth to 1 percent from 1.1 percent. Inflation was projected at 2.4 percent for 2012 and 1.6 percent for 2013.
“Uncertainty is increasing massively and I think it is important that in a sensitive situation like this, every step of monetary and economic policy is taken with great caution,” he said.
Nowotny, who also heads the Austrian central bank, said he was “warning” of taking “rash” or “brute” measures, comparing the situation to the murder of the Archduke of Austria in 1914 in Sarajevo, which led to the start of the First World War.
“Measures that appear self-evident and are supported by the public can lead to a chain reaction and end in catastrophe,” Nowotny said, citing the return to old currencies or an ousting of the Greeks from the euro area “without appropriate insurances.”
Nowotny said that while a central bank had little influence on cost inflation, the ECB had a wide set of instruments to fight demand inflation. While there are no indications of demand inflation in the euro area, the ECB could react immediately, should this change.
“We could overnight immediately raise the reserve requirement rate, we could undue all the expansive measures we have set,” Nowotny said. “A fear that there might be uncontrollable waves of inflation, can perhaps exist in respect to the development of costs that we can only influence with difficulties, but certainly not regarding the development of demand.”
Price stability remains the top priority for the ECB, Nowotny said. Referring to recent differences between Germany’s Bundesbank and the ECB regarding a bond-buying plan, Nowotny said that these were “differences on details.”
“What always exists are diverging views on details of technical implementation and such, but you have to see this in the right dimension -- this isn’t about principles,” he said.
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