ECB stays cautious about recovery and inflation in 2003

The basic interest rates for the euro will not fall again soon, European Central Bank (ECB) President Wim Duisenberg and his deputy, Lucas Papademos, suggested in separate statements earlier this week. The statements are seen as an attempt to dampen expectations arising from Duisenberg’s statement – after last week’s euro rate cut by 50 basis points – that «if US rates are still lower than ours, we have evidently not exhausted our margins.» The ECB’s long-term economic forecasts, contained in its June bulletin, mainly point to two things: First, recovery in the eurozone will be difficult and if it gets underway, will do so at about the end of the year. The ECB talks of a growth rate of between 0.4 and 1 percent this year, a far cry from its previous 1.1-2.1-percent range. Secondly, ECB is not as optimistic as many others regarding the rate at which inflation will fall in the eurozone. Experts predict prices will rise by between 1.8 and 2.2 percent during the year, against a previous forecast of between 1.35 and 2.3 percent. A drastic fall is foreseen for 2004, to between 0.7 and 1.9 percent, compared to older projections of between 1.0 and 2.2 percent. With such data in mind, Papademos told reporters on the sidelines of a seminar held in Vienna on Thursday that the ECB is closely monitoring developments in the European economy and will continue doing so in the next few months. He emphasized, nevertheless, that ECB does not, for the time being at least, fear that the eurozone may fall into stagflation. «We have to follow developments carefully to see to what extent the economy is generally aligned with our expectations of its course and inflation,» he said. Recovery, he added, will come around the end of the year but 2004 seems more likely. But if deflation does not seem a strong prospect for the entire eurozone, Papademos did not seem to rule out such a prospect in some countries. Economists have expressed fears that recession may hit Germany, which will have direct repercussions throughout the eurozone. In any case, Papademos said, any chances for deflation are very small. The reason is the underlining inflationary pressures on wages and service prices. Much depends on developments in the US economy, says the ECB in the preamble to its macroeconomic forecasts. The ECB believes that American recovery will be on time, that is, at about the end of the year. It is noted, however, that such positive prospects are modified by weaknesses in corporate profits and the gradual restoration of macroeconomic equilibrium. Finally, the ECB’s forecasts regarding international trade appear cautiously optimistic and eurozone exports are projected to rise 4.5 percent in 2003.

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