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Bank Of Portugal Sees Slowdown In '09, Short-Term Inflation

LISBON -(Dow Jones)- Portugal's central bank governor, Vitor Constancio, said late Monday the country will likely enter 2009 in an economic slowdown because of the lingering effects of the international credit crisis, while inflationary pressures will continue to be felt in the short term.

"The turbulence and its conditions aren't yet over", Constancio, who is also a member of the European Central Bank Governing Council, said at an economic conference in Lisbon.

Like its euro-zone peers, Portugal has seen high oil prices take a toll on its economic growth while also contributing to inflationary pressures. Portugal was the only country among the 15 to suffer an economic contraction in the first quarter.

Constancio said he expects Portugal to show economic growth similar to that of the euro zone in the second quarter, because the economic backdrop likely will deteriorate for the 15 member states.

The ECB hasn't budged from its monetary stance since June 2007, keeping its key interest rate unchanged at 4% despite rising prices.

Constancio said that Portugal's current predicament is not due to monetary policy, because while interest rates may not have changed, interbank rates and spreads have risen to put a lid on inflation.

He added that the strength of the euro hasn't had much of an effect on the Portuguese economy because two thirds of the country's exports are aimed at other European countries.

As for inflationary pressures, Constancio said "they are impossible to solve in the short term" and that the policy makers' focus should now be on avoiding second-round effects form the credit crisis, by boosting domestic companies' competitiveness and attracting foreign investment.

Portugal's annual consumer price inflation in April of 2.5% was still below the euro-zone average but above the ECB's comfort zone of around 2%.

-By Filipa Cunha, Dow Jones Newswires; 35-1-21-319-1863; filipa.cunha@dowjones.com

(END) Dow Jones Newswires

May 26, 2008 17:27 ET (21:27 GMT)


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