KUALA LUMPUR, Nov 2: European inflation should edge back under two per cent, although the risks remain evenly balanced despite disappointing Euro zone growth in 2002, European Central Bank council member Yves Mersch said on Saturday.

Euro zone inflation was likely to be between 1.6 and 1.9 per cent in the medium term, Mersch, Governor of the Central Bank of Luxembourg, told Reuters on the sidelines of the ACI financial markets conference in Kuala Lumpur.

The ECB meets on Thursday, and Mersch said the proximity of the decision prevented him from commenting on interest rates.

A Reuters poll last week found 37 economists expected the ECB to hold its benchmark refinancing rate at 3.25 per cent on Thursday, while 11 expected a rate cut.

Mersch said European growth was likely to come in around or below one per cent in 2002, and an expected pickup in activity had definitely been delayed although there still would be growth.

Our projections for inflation all head towards an inflation rate that is coming down from present levels below the two percent which we qualify as the definition for medium term price increases.

But the decreasing inflation for the medium term still points at an inflation rate certainly above 1.5/1.6 per cent, in the range of 1.6 and 1.8/1.9 per cent, he said.

The ECB has a self-imposed two per cent ceiling for inflation. Euro zone inflation has been above that target for three months, with preliminary data for October showing a rate of 2.2 per cent.

There are upward risks for inflation, there are downward risks for inflation, and the overall appreciation of the ECB is that we have a balanced stance vis-a-vis inflationary pressures for the medium term, Mersch said.

Upside risks included the reaction of oil prices to any military action against Iraq.

The ECB also aimed to prevent one-off price shocks, such as an oil price surge, from becoming entrenched and leading to rising prices and wages — and there were some worrying signs already on that front, Mersch said.

Wage developments in the recent past have been quite responsible, but in the beginning of the year we have had an upsurge in wage prices which gave some rise for concern.

But countering those upside risks were exchange rate developments and the slowing pace of economic growth.

Mersch did not comment on the value of the euro, which hit a three month high of $1.0003 on Friday and has gained around 12 per cent this year against the US dollar, saying the ECB targeted price stability, not an exchange rate.

On European growth, Mersch said there was no doubt that an expected upturn was late.

We do not expect to have a considerable upturn during the second half of the year, and by and large it is a little bit disappointing, he said.

Probably we will have growth rates this year which are much below the forecasts that we had at the beginning of this year — but it will be growth.

Our forecast in the ECB for the Euro zone as a whole for this year will be around or something below one per cent, he said, adding the IMF and European Commission had similar views.

The important factor was that Europe was still growing.It is, for sure, that the pickup has been somewhat delayed.But when I say the pickup or the pace of the upturn has been delayed, that does not mean that we are moving downward, Mersch said.—Reuters