The eurozone according to European Central Bank Vice President Lucas Papademos will experience higher inflation and slower growth, which would be an "uncomfortable" but temporary combination.
"The current conjuncture seems to point to an uncomfortable, though temporary, combination of higher inflation and somewhat slower economic growth in the coming months," Papademos said.
He said inflation among the 13 of the 27 EU members that have adopted the single currency spiked to 2.6 percent in October, from 2.1 percent the previous month.
The European Central Bank's stated aim is to keep inflation just below 2 percent over the medium term. But the recent increase in inflation has been driven by higher oil and food prices, which Papademos said is expected to continue for some time. He was speaking at a lecture on Cyprus' Jan 1, 2008 adoption of the euro.
At its last meeting on rate policy, the European Central Bank left its key interest rate unchanged at 4.0 percent, saying it needed more time to study the impact of the recent global credit crisis.
Since midsummer, a crisis in U.S. mortgage markets has roiled markets around the world and led several major banks to write off billions of euros in bad loans.
"The ECB is prepared to act in an effective and timely manner to ensure that the risks to price stability over the medium term do not materialize and that inflation expectations remain firmly anchored to price stability," said Papademos.
He added, however, that the recent instability in financial markets could last longer and have a broader impact than previously expected.
"This process can be seen as a correction to the underpricing of risks in recent years, especially those risks associated with segments of the markets for credit and structure finance products," Papademos said.
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