ECB says will act in a firm and timely manner

The European Central Bank's policymakers will act in a firm and timely manner to ensure that knock-on effects from higher oil prices do not appear, the ECB said in the editorial of its December bulletin.

The monthly bulletin's editorial, as usual, closely followed the monetary policy statement delivered by ECB President Jean-Claude Trichet on December 6, when the Governing Council decided to leave rates unchanged at 4 percent.

By acting in a firm and timely manner on the basis of our assessment, the Governing Council will ensure that second-round effects and risks to price stability over the medium term do not materialize, the editorial said.

The bulletin described euro zone economic fundamentals as sound but with a risk that growth could be worse than expected and uncertainty caused by financial market turbulence.

There were strong short-term upward pressures on inflation, and over the medium term there were also upward risks, the editorial said.

Firmly anchoring medium and long-term inflation expectations in line with price stability is all the more important at times of financial market volatility and increased uncertainty, it said.

Against this background, and with money and credit growth remaining very vigorous in the euro area, the Governing Council stands ready to counter upside risks to price stability.

In separate articles in the bulletin, the ECB also highlighted potential dangers to the inflation outlook from food inflation and public inflation expectations.

Food price inflation may increase somewhat further in the very near term as the past increases in producer costs are passed through to retail prices.

Barring further shocks in food commodity prices, HICP food price inflation should subsequently fall back towards levels more consistent with its historical average, the article continued, but noted that risks were on the upside.

Longer-term headline inflation expectations derived from financial markets had also risen significantly since earlier in the year, and needed to be monitored carefully, another article said.