ECB Will Miss Goal for 11th Year, Forecasters Predict

By Gabi Thesing

Aug. 14 (Bloomberg) -- The European Central Bank will fail to achieve its goal of keeping inflation below 2 percent for an 11th consecutive year in 2010, according to a quarterly survey of forecasters published by the ECB today.

The forecasters predict inflation will average 3.6 percent this year, 2.6 percent in 2009 and 2.1 percent in 2010, raising their expectations from May, the Frankfurt-based central bank said. The expectation for inflation in the longer term, defined as through 2013, rose to 2.03 percent, the highest since the survey started in 1999 and up from 1.95 percent three months ago.

``The survey is an unwelcome challenge to the ECB's credibility,'' said Julian Callow, chief European economist at Barclay's Capital in London. It tallies ``with a whole range of other surveys all pointing in the same direction. They signal a lack of confidence in the ECB's ability to meet its own definition of price stability.''

The ECB aims to keep annual price gains ``close to but below'' 2 percent, a goal it has missed every year since 1999. Inflation in the 15-nation euro region is currently running at 4 percent, the fastest pace in 16 years. The bank raised its benchmark rate to a seven-year high of 4.25 percent last month, citing its desire to keep inflation expectations in check to prevent a wage-price spiral.

Rising inflation expectations ``reflect the elevated levels of oil, commodity and food prices as well as, to a lesser extent, concerns about higher wages,'' the ECB said today.

Record Oil Price

The price of oil has gained 61 percent over the past year, reaching a record $147.27 on July 11. Negotiated wages in Germany, Europe's largest economy, jumped 3.5 percent in the year through April, the biggest gain in 12 years.

``There is a risk that inflation will simply not come down to the levels we were used to in the past,'' said Kenneth Broux, an economist at Lloyds TSB Group Plc in London. ``There is a stronger chance that the ECB will raise rates next year than cut them.''

Investors increased bets that the ECB's next move will be a rate reduction after Trichet said on Aug. 7 growth will be ``particularly weak'' through the third quarter. The yield on the March Eonia forward contract was at 4.11 percent today, down from 4.38 percent on Aug. 6.

The euro-region economy shrank 0.2 percent in the second quarter, its first contraction since the launch of the euro almost a decade ago, as surging energy and food costs damped consumer spending.

Slower economic expansion will not be enough to bring inflation back into the ECB's comfort zone over the next two years, the survey of forecasters suggests.

They predict inflation will remain above 2 percent even after cutting their 2009 growth prediction to 1.3 percent from 1.6 percent. Growth will pick up to 1.8 percent in 2010, they predict. Last year, the economy expanded 2.7 percent.

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net.