Annual Report 2004

The Eurosystem Secures Price Stability
Euro Area Key Interest
Rates Unchanged in 2004
Following two years of subdued
growth (2002: 0.9%; 2003: 0.5%),
euro area GDP expanded by 2.1%
in 2004. The growth momentum that
gained a foothold in the second half of
2003 was maintained at the beginning
of 2004 but subsequently dampened
by surging oil prices in the second
half. Investment remained moderate
throughout 2004. Despite low interest
rates and a pickup in profitability,
investment in plant and equipment
merely edged up. Construction investment,
in fact, even diminished
marginally. While consumer spendingpickedupsomewhattowardthe
end of the year, it provided hardly
any impulses. The revival in world
trade lifted AustriaÕs current account
surplus slightly compared with 2003,
bringing it to 0.5% of GDP. The upturn
hardly had a perceptible impact
on the labor market yet in 2004: Employment
rose by 0.5% and unemployment
persisted at 8.9% in 2004.
Euro area inflationary pressure
remainedsubduedeventhoughdemand
recovered in the first half of
2004, above all because wage in-
Euro Area Interest Rates
%
6.0
5.0
4.0
3.0
2.0
1.0
creases were modest and the impact
of the appreciation of the euro was
delayed. From May 2004, the rate
of inflation as measured by the HICP
topped 2%, which may be traced to
the hike in indirect taxes and administeredpricesaswellasthegaininoil
prices. In the second quarter of 2004,
the energy component accounted for
as much as 20% of the price growth.
Yet in its judgment of the mediumterm
risks to price stability, the Governing
Council of the ECB assessed
inflationary pressures to remain limited,
above all because the labor market
was weak and wage adjustments
would thus remain moderate. The inflation
projections of the Eurosystem
of June 2004 put inflation at between
1.9% and 2.3% for 2004 and at 1.1%
to 2.3% for 2005.
These developments brought inflation
to an average of 2.1% in
2004, the same level as in 2003.
Against this background of only slight
price pressures and a positive medium-term
outlook for prices, the
Governing Council left the key Eurosystem
interest rates unchanged at a
historically low level. Throughout
2004, the minimum bid rate for main
refinancing operations (MROs) thus
0.0
1999 2000 2001 2002 2003 2004
Deposit facility
Marginal lending facility
Allotment rate (fixed rate tender) or minimum bid rate (variable rate tender) in MROs
Source: ECB.
2005
Strong euro and oil
price surge dampen
economic recovery in
the euro area
Inflationary pressure
moderate — key
interest rates
unaltered
Annual Report 2004 ×
17