The European Central Bank (ECB) was under mounting pressure to cut borrowing costs this week after admitting that the eurozone will grow this year at half the speed it originally expected.
Blaming the attack on Iraq for the region’s stagnant growth in the first quarter of the year, the bank said there was no sign of a post-war rebound.
”Survey evidence for April and May does not suggest immediate improvement after the resolution of this conflict,” the ECB noted in its latest quarterly bulletin. ”Accordingly, economic growth in the first half of 2003 is likely to be very weak, and expectations for annual average growth for this year and next have had to be scaled down.”
The bank is now expecting output to rise by between 0,4% and 1% — compared with a range of 1,1% to 2,1% it projected in December. Its growth projection for next year has been lowered to between 1,1% and 2,1% — down from between 1,9% and 2,9%.
ECB president Wim Duisenberg painted an uncertain picture of economic conditions in the eurozone economy, where inflation is receding significantly and growth is weak.
”Economic growth in the first half of 2003 is likely to have been very weak, and expectations for annual average growth this year and in 2004 have had to be scaled down,” he said.
But Duisenberg sought to downplay expectations that the Frankfurt-based ECB would ease rates at its next meeting, in two weeks’ time.
Hopes of lower borrowing costs had been raised when Duisenberg noted earlier that rates in the eurozone were still 75 basis points above United States borrowing costs. He kept the market guessing, repeating his observation that the bank still had plenty of room to manoeuvre, even as he dismissed talk of rate cuts as ”premature”.
Analysts said his comments were intended to quell talk that the bank could cut rates by 50 basis points at its next meeting.
With output falling over the first quarter in Italy, Germany and The Netherlands, other analysts said it would be hard for the ECB to lower borrowing costs during the short term. — Â