Inflation in the euro area is likely to remain subdued, according to the European Central Bank, lessening the prospects of an interest rate rise.
In its February bulletin, the ECB said that inflation in the euro area is expected to average 1% in the short term. This contrasts with an annual fall in inflation in Ireland of 2.4%, as prices continue to drop.
However, the bank warned that the bad state of government finances in Europe means that indirect taxation and government controlled charges may go up more than expected.
The ECB said the rate of growth in bank loans to the private sector was 0% during the fourth quarter, with loans to households increasing, but loans to businesses falling.
The ECB also reported that the net tightening of credit standards applied by banks has continued to diminish, as the credit crisis eases.
Based on the January survey of euro area banks, the ECB says that the tightening of credit standards that started in the second half of 2007 has continued. While a turning point in that trend is now closer, it has not yet been reached at Euro area level.
The ECB also said that demand for loans among businesses continues to decline, but it noted an increase in mortgage lending, with an upswing in the euro area property market observed for the first time since 2006.
It said that banks have continued to reduce the size of their overall balance sheets during the past quarter. The ECB said the challenge to the banking sector is to continue to reduce the size and structure of their balance sheets whilst ensuring the availability of credit to businesses.
It also stated that banks should use the improved funding conditions to strengthen their capital bases further and, where necessary, take full advantage of government support measures for recapitalisation.
Next month the ECB governing council will take decisions on the gradual withdrawal of the extraordinary liquidity measures, which it says are not needed to the same extent as in the past, as banks are increasingly able to raise funding on commercial markets.
Meanwhile, NCB economist Brian Devine said in a note this afternoon that all four of the world's main central banks, including the ECB, were likely to keep their main interest rates unchanged for the rest of this year.
