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Wednesday, 30 October, 2002, 01:06 GMT
IMF trims Euro growth forecast
Euro coins and notes
Inflation is still a problem, the ECB believes
The International Monetary Fund has trimmed its forecast for eurozone growth, and suggested that the bloc's central bank should consider cutting rates to kick-start the economy.

The IMF on Tuesday lowered the region's 2002 growth forecast to just 0.75% from 0.9% last month, and revised its growth prediction for 2003 down to 2% from 2.3% last time.

It added that the recovery would remain "tepid", warning that the area still faces "considerable downside risks".

"The economy is fairly weak and we don't see a very robust recovery in prospect," said Michael Deppler, the head of the IMF's European department.

He added that in view of persistently sluggish growth in the region, a "clear bias towards further monetary easing would be appropriate".

Reluctance

The European Central Bank (ECB) last year cut rates to ward off the global economic downturn, but did so less aggressively than its US counterpart, the Federal Reserve.

The ECB last cut borrowing costs in October 2001, leaving them at their current low of 3.25%.

It has since resisted pressure for further cuts to stimulate the faltering economy, arguing that inflationary risks are still present in the form of rising wage trends and high oil prices.

Slower growth has been particularly evident in Germany, once seen as Europe's economic powerhouse.

Rules broken

The IMF also praised the EU's growth and stability pact, a set of rules obliging European governments to impose strict limits on budget deficits.

Earlier this year, The European Commission controversially agreed to push back the date by which governments must balance their budgets by three years to 2006 after it emerged that the eurozone's three biggest economies - France, Germany and Italy - were in danger of exceeding their deficit ceilings.

More recently, European Commission President Romano Prodi called the pact "stupid," saying it imposed a fiscal straitjacket on governments during times of low growth.

"The growth and stability pact is a sound framework, but it has a credibility problem," Mr Deppler said.

"The core of the problem is the fact that the three largest countries have basically not lived up to the rules."

See also:

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