Bernanke's optimism contrasts with inflation fears in Europe

Bernanke's optimism contrasts with inflation fears in Europe
By Chris Giles in Londonand Ralph Atkins in Frankfurt
Copyright The Financial Times Limited 2006
Published: September 1 2006 03:00 | Last updated: September 1 2006 03:00


The Federal Reserve and the European Central Bank painted contrasting pictures of the US and European economies yesterday, with Ben Bernanke, Fed chairman, depicting a US economy that could continue to grow rapidly without generating inflation, while the ECB hinted that further interest rate rises were needed to stem inflationary pressure in the eurozone.

Together, the statement by Jean-Claude Trichet, ECB president, and the speech by Mr Bernanke indicated that European interest rates were likely to rise while there was no urgency for further US rate rises.

Mr Bernanke gave an optimistic assessment of the US economy's ability to continue rapid economic growth without triggering further inflationary pressures.

He said recent downward revisions to official statistics on US national income and output did "not appear to require a significant rethinking of long-term productivity trends".

His comments showed that he thinks the US economy can still grow a little over 3 per cent a year without stoking inflation and interest rates.

Many economists have recently said that downward revisions to recent years' data imply that the underlying speed limit of the US economy had fallen to 3 per cent or below.

Bond and equity markets were little moved by Mr Bernanke's optimism.

But Mr Bernanke's belief in the strong prospects for long-term US productivity performance was tinged with a warning that new technology alone would not secure the US a competitive advantage.

Across the Atlantic, Mr Trichet announced big upward revisions to the ECB's inflation forecasts for this year and next and called for "strong vigilance" to defend price stability - code words used to signal an interest rate increase in early October.

He added that he expected "a progressive withdrawal of monetary accommodation", implying more than one rise in borrowing costs was likely.

Mr Trichet's comments followed the unexpected strength of the eurozone recovery in the second quarter, and ECB fears about the impact on inflation in 2007 of oil prices and a three percentage point rise in the German consumer tax rate next year.

Eurozone consumers' fears about inflation increased in August to the highest level since the introduction of euro notes and coins in 2002, according to a European Commission survey yesterday.

The ECB left its main interest rate unchanged at 3 per cent. But a quarter percentage point rise is now expected at the bank's meeting in Paris on October 5.