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Cautious ECB raises inflation threat

The European Central Bank (ECB) warned yesterday that inflation still threatened the eurozone but said it wanted more data on financial market uncertainty before deciding whether to raise interest rates.

"The medium-term outlook for price stability remains subject to upside risks," the ECB said in its monthly bulletin, repeating comments made last week by president Jean-Claude Trichet when its key interest rate was left unchanged at 4.0 percent.

But "given a high level of uncertainty" in the wake of the US home loan crisis, "it is appropriate to gather additional information and to examine new data before drawing further conclusions for monetary policy," it added.

After the report was released, the euro hit a record high of 1.3927 to the dollar, which could help stem inflation but also curb eurozone economic growth.

The ECB had originally been expected to raise its main lending rate on June 6, but held off amid warnings that increasing the cost of borrowing in the eurozone would fuel tension within the global banking system.

But the bank said yesterday that fundamentals were strong in the 13-nation zone and that as a result, "the ECB's monetary policy stance is still on the accommodative side," which means it believed inflation could strengthen as well.

Additional indirect taxes, higher oil and agricultural prices and wage increases were among the factors that could push inflation higher, the bank said.

It repeated the ECB's growth forecast of 2.5 percent this year, compared with a previous forecast of 2.6 percent, and 2.3 percent next year, unchanged from its previous outlook.

But market volatility has not subsided substantially and the US Federal Reserve was expected to lower its key interest rate to boost an economy hit by defaults on the high-risk market for mortgages, also known as the subprime market.
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