ECB on alert

The Euro-zone growth prospects will remain subdued in the near term, but there is some evidence of a German revival and the economy is also gaining support from the weaker Euro. Overall growth rates will remain uninspiring at best.

The Euro-zone consumer inflation rate increased to a revised 2.6 percent in September from 2.5 percent and the ECB will be concerned over the inflation outlook, especially as inflation is above the 2 percent target. Although the underlying inflation rate is under control, the bank will be on high alert and anxious to avoid secondary inflation from taking hold.

The ECB will continue to face a tough balancing act in the short term as it would prefer to avoid higher interest rates given the fragile state of demand. The ECB will, however, need to control inflation expectations, especially with rising money supply growth. It will consider a rate increase in the fourth quarter and will continue the tough rhetoric even if rates are left at 2 percent. A tighter ECB stance would offer support to the Euro.