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Thursday, 14 June, 2001, 16:54 GMT 17:54 UK
ECB downgrades European growth
European Central Bank
The ECB has become more concerned about the global slowdown
The European Central Bank is feeling more pessimistic about the eurozone's growth prospects and has said it will keep a vigilant eye on inflation.

In its latest monthly report on the eurozone economy, the ECB revised downwards its estimates for growth in the 12-country zone to a range of between 2.2% and 2.8%.

This is well below the earlier prediction of between 2.6% and 3.6%, and lower than last year's actual figure of 3.4%.

ECB forecasts
Growth estimates in 2001: 2.2-2.8%
Growth estimates in 2002: 2.1-3.1%
Inflation forecast in 2001: 2.3-2.7%
Inflation forecast in 2002: 1.2-2.4%

Source: ECB
Economists forecast on average a growth rate of about 2.3% - also well below their original predictions.

In cautious tones, the ECB also admitted that the global slowdown appeared to be worse than once envisaged.

"It cannot be excluded that the international environment could develop less favourably than assumed," the ECB said.

Inflation to climb

At the same time, the ECB said that inflation could increase to between 2.3% and 2.7% in 2001, up from previous forecasts of between 1.8% and 2.8%.

The Bank blamed a jump in oil and food prices for the projected rise in inflation - well above its target rate of 2%.


Close attention needs to be paid to factors which might lead to a resurfacing of upward risks to price stability

ECB
It is also wary about the effects of wage demands.

"Close attention needs to be paid to factors which might lead to a resurfacing of upward risks to price stability," the ECB warned.

In April, eurozone inflation climbed to about 3%, according to the harmonized index of consumer prices.

Euro success

The ECB's president, Wim Duisenberg, meanwhile, hailed the euro's brief history as a success story.

Speaking in the Netherlands, he said "the success of the euro should not be read from the exchange rate but by whether or not the ECB target of price stability in the eurozone has been reached".

Mr Duisenberg said the single currency had brought the eurozone low inflation "amid circumstances that were often adverse".

No guidance on interest rates

Nevertheless, the ECB appeared confident that inflation would begin to recede towards the end of the year as oil prices decline.

"World oil prices are expected to fall back somewhat", the Bank said, adding that inflation in 2002 was likely to fall below 2%.

The ECB chose not to provide any guidance in the report on possible moves to cut interest rates.

All it said was that the current interest rate of 4.5% was appropriate for keeping a cap on inflation.

However, most economists believe that the Bank will cut rates again at some point this year, following its surprise cut last month.

Wrong-footed

On 10 May, the ECB cut its key interest rate by a quarter point to 4.5%.

The move wrong-footed the financial markets, which had been lulled by the ECB's wait-and-see mantra.

If inflation does ease up, as the Bank expects, there could be scope for another reduction in rates.

Unlike the Federal Reserve, which has cut US rates fives times this year to 4%, and the UK's Bank of England, the ECB has been dilatory in trimming eurozone interest rates.

The persistently high level of inflation in the eurozone has been the main reason cited by the ECB for avoiding cuts.

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