PARIS (MktNews) - Eurozone inflation should dip below the European Central Bank's (ECB) ceiling of 2% in the second half of this year and fall to just over 1.5% by year's end, the French Finance Ministry forecast Thursday.
At the end of next year, EMU inflation should stand at 1.6%, the ministry projected in its spring economic outlook.
Tighter eurozone labor markets should bring only a "very limited" rise in core EMU inflation this year, as wage accords remain moderate, notably in Germany, and structural reforms should enhance competition, it argued.
Lower crude oil prices, expected to average $25.30 per barrel this year and $23.50 next year, would dampen the knock-on effects on core inflation, it added. So far, such effects have been limited to the semi-finished goods sector. Core inflation should continue rising next year, but remain under 2% at the end of the year.
Average eurozone inflation is seen at 1.9% this year and 1.6% next year, while France should remain at the low end with rates of 1.3% both years.
The combined EMU public sector deficit, excluding UMTS licence revenues, is projected to decline to 0.5% of GDP this year from 0.8% last year, then rise to 0.6% in 2002. France has target a decline from 1.3% to 1.0% this year and to 0.6% next year.
Germany's public deficit is seen rising from 1.2% to 1.6% this year as GDP growth slows to 2.3% and tax cuts take effect. The deficit is projected to fall back to 1.3% in 2002.
Belgium's deficit is seen falling from 0.2% of GDP last year to 0.1% this year, then rising to 0.4% next year. Spain would swing from a first-time public surplus of 0.1% of GDP this year to a deficit of 0.1% next year.
The ministry's projections take on board financial market expectations for a "slight decline" in EMU short-term interest rates over the next two years.
However, with inflation expected to fall, monetary conditions would tighten slightly, it said. (The projections assume a steady euro exchange rate at $0.93.)
"Nevertheless, (monetary conditions) would remain relatively accommodative," it said. "Moreover, long-term rates should continue to benefit from the further consolidation of public finances and revenues from the sales of UMTS licences," it added.