June 9, 2017 / 6:13 AM / a year ago

French central bank raises growth forecast, sees deficit cap missed

PARIS (Reuters) - The French economy is set to expand slightly more than expected through 2019 thanks to stronger international trade, but is at risk of breaking its public deficit commitments, the central bank forecast on Friday.

FILE PHOTO: A general view shows the illuminated Eiffel Tower (L), the Hotel des Invalides (R) and rooftops at night in Paris, France, November 28, 2016. REUTERS/Charles Platiau/File Photo

Though the economy - like the broader euro zone economy - was picking up faster than expected, Bank of France governor Francois Villeroy de Galhau said easy monetary policy was still warranted for the bloc.

“We remain active because there is still a need for accommodative monetary policy,” Villeroy said on Radio Classique. “We are not yet at the target for two percent inflation over the medium term.”

The European Central Bank shut the door to more interest rate cuts on Thursday at a policy-setting meeting, judging the euro zone economy to be rebounding, but said inflation looks to remain weak for years.

In its biannual economic outlook, the Bank of France said growth should pick up from an estimated 1.4 percent this year to 1.6 percent in both 2018 and 2019. That was up from estimates in December for growth of 1.3 percent in 2017, 1.4 percent in 2018 and 1.5 percent in 2019.

In a sign the recovery remains fragile, industrial output unexpectedly slumped 0.5 percent in April, data published on Friday showed.

While improving international trade would help underpin activity, consumer spending would offer less support than in recent years as wage gains lagged behind higher inflation, the central bank said.

After inflation of only 0.3 percent in 2016 amid weak energy prices, it estimated consumer prices would rise 1.2 percent this year and next, and 1.4 percent in 2019. While the 2017 estimate was unchanged from December, the forecasts for 2018 and 2019 were trimmed slightly on expectations for weaker oil prices.

The central bank forecast a public deficit of 3.1 percent of economic output this year, above the 2.8 percent expected by the previous Socialist government.

That would mean France missing the 3 percent EU deficit limit again even though the government of former president Francois Hollande had promised it would be respected this year for the first time in a decade.

While the new centrist government has said it would stick to that pledge, Budget Minister Gerald Darmanin told Le Monde newspaper on Thursday that reducing the deficit to 2.8 percent from 3.4 percent last year was “too optimistic”.

Prime Minister Edouard Philippe said on Europe 1 radio he was “a bit concerned” Hollande’s government may have let the budget slip ahead of the April-May presidential election and would wait for an audit next month to have the exact state of the finances.

Editing by Richard Lough

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