The current level of euro zone interest rates is 'appropriate' for a pick-up in the economy, even if there is still no sign of a sustained recovery in the 12-country euro area, the European Central Bank said today.
'Available data are still mixed, with some of the most recent indicators showing a slight improvement, but there are no signs as yet that a more sustained recovery in economic activity has already started,' the ECB wrote in its July monthly bulletin, released today.
'High and rising oil prices in particular appeared to have weighed on demand and confidence' in the single currency area. On the basis of current information, the growth rate in the second quarter is expected to be lower than the first-quarter growth rate of 0.5% quarter-on-quarter,' the bank predicted.
Nevertheless, despite heavy political pressure for a cut in rates to help kick-start stalled demand in the euro area, the ECB insisted that it was already doing enough to boost growth and employment in the region.
The current level of borrowing costs - the ECB has held its central 'refi' refinancing rate steady at 2% for more than two years - was 'appropriate,' the bank's chief economist Otmar Issing said last night.
And the ECB was currently not leaning either towards higher or lower rates, Issing said in comments only released for publication today.
The chief economist said that the ECB was playing its part by ensuring that prices remained stable. The priority now was to restore ailing confidence in the single currency area, he said. Euro zone governments needed to make their contribution by respecting the European Union's budget rules and applying budgetary rigour, he said.
Turning to the outlook for price stability, which the ECB defines as consumer price increases of close to but just under 2%, the ECB economist said that there was still a chance that the annual average of area-wide inflation would come back below the 2% level this year.
But runaway oil prices would lessen the chances of that happening, Issing said. 'It can't ruled out that annual inflation will average less than 2% in 2005. It depends very strongly on petrol prices', he said.
