Eurozone will probably experience 'very mild' recession this year, with higher energy prices not affecting inflation in the long term, says ECB official

Cindy Allen

FRANKFURT, Germany , March 12, 2012 (Associated Press) – A top European Central Bank official says the 17 countries that use the euro will probably see a "very mild recession" this year and that higher oil prices should not have a lasting impact on inflation.

Benoit Coeure, an ECB executive board member, told Japan's Nikkei newspaper that growth was held back by scarce bank credit and necessary government budget-cutting because of problems with debt in some eurozone countries.

He added that higher oil prices and increased value-added taxes on consumer purchases in some countries had led the bank to raise its outlook for inflation but that "insofar as they are temporary, higher energy prices should not have a lasting impact on inflation."

Coeure said that whether inflation rose over the longer term would depend on whether higher oil prices were reflected in higher wages, creating so-called second round effects or a wage-price spiral.

He said in an interview text made public Sunday that "there are good reasons to believe that second-round effects will be limited."

Coeure is one of six members of the ECB's executive board, the body that runs the bank day to day at its Frankfurt headquarters. He also sits on the 23-member governing council, which decides interest rates.

Higher prices have become part of the bank's discussion of the economy in recent days thanks to higher prices for crude and an easing of the eurozone debt crisis with a successful debt reduction and second bailout for Greece. Fears of a deeper recession and financial crisis pushed inflation concerns to the background in the last two months of last year when the bank cut interest rates.

But inflation increased in February to 2.7 percent, above the bank's goal of just under two percent, and ECB President Mario Draghi said at his news conference last week that it was likely to remain over 2 percent for all of this year before falling. For 2013 the bank projects inflation between 0.9 and 2.3 percent.

Draghi made renewed mention of the bank's primary mission of keeping inflation under control, as spelled out in the basic EU treaty, saying that task was "of the essence."

That, along with expectations of a mild rather than deep recession, lead some analyst to think the ECB will not lower its benchmark rate below the current record low of 1 percent and may leave them unchanged into next year. Lower rates help growth but can worsen inflation if done at the wrong time.

The bank has helped bring a period of respite from the eurozone debt crisis with two offerings of more than euro1 trillion ($1.32 trillion) in cheap, 3-year loans to banks. The loans added around euro500 billion net in new cash to the banking system, given that some of the money was moved to the new loan offering from previous ECB loan programs.

The money has helped weaker banks repair their finances and led some of them to buy government bonds. That lowered borrowing costs for indebted governments such as Italy and Spain. High borrowing costs fed by fears of default are what drove Greece, Ireland and Portugal to seek bailout loans from other eurozone countries and the International Monetary Fund.

The eurozone economy shrank 0.3 percent in the fourth quarter, and two quarters of negative growth is one definition of recession.

The ECB's staff projections foresee growth between minus 0.5 percent and plus 0.3 percent this year.

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