Frankfurt, March 13 (Bloomberg) -- The European Central Bank said economic growth will remain ``subdued'' and inflation will probably slow, signaling it may reduce interest rates. ``The outlook for price stability in the medium term has improved in recent months, owing in particular to the subdued pace of economic growth and the appreciation of the exchange rate of the euro,'' the ECB said in its monthly report. The bank, which sets monetary policy for the dozen nations sharing the euro, last week cut its benchmark interest rate by a quarter point to 2.5 percent, the lowest in almost 3 1/2 years. The reduction, the second in four months, was smaller than most economists expected. The region's $7 trillion economy may contract this quarter, the European Union predicts. Western European car sales fell 3.5 percent last month and Royal Philips Electronics NV said today it plans to shed 1,600 jobs.
``Another rate cut is looming,'' said Karsten Junius, an economist at DekaBank in Frankfurt and co-author of a 2002 book on the central bank. ``The ECB is highly alarmed by the state of the economy.'' ECB President Wim Duisenberg said last week the bank trimmed its forecast for economic growth this year to 1 percent, compared with a December estimate of as much as 2.1 percent. The inflation rate, which the ECB aims to keep below 2 percent, climbed to 2.3 percent in February from 2.2 percent in the previous month, mainly because oil prices have risen by more than 40 percent in the past 12 months.
Preparation for War
Demand for exports, which account for about a fifth of the region's economy, is being hurt by the 26 percent rise in the value of the euro against the dollar in the past 12 months. In Germany, exports rose 0.3 percent in the fourth quarter, from 2.9 percent in the July-to-September period. Preparations by the U.S. and the U.K. for a war with Iraq are eroding consumer confidence and prompting companies to delay some purchases as well as eliminate jobs. Household optimism in the euro region fell to the lowest in more than six years in February, orders to German machinery makers fell 8 percent last year while unemployment rose to 10.5 percent in February. Central banks can't erase concerns about the impact of war on the economy, the ECB said. ``Any judgement on future developments is overshadowed at present by the political tensions and their potential resolution,'' the report said.
`Act Decisively'
``Monetary policy cannot address this kind of uncertainty,'' the bank said. At the same time, the ECB's ``governing council stands ready to act decisively and in a timely manner.'' The ECB has trimmed the cost of money six times since the start of 2001, half as often as the U.S. Federal Reserve, which has lowered its overnight lending rate to a 41-year low of 1.25 percent. The Bank of England cut borrowing costs eight times in the same period to 3.75 percent. Policy makers at the Frankfurt-based ECB may trim borrowing costs again, futures trading suggests. The rate on a three-month euro deposit maturing in June was 2.30 percent at 10:42 a.m. in Frankfurt. ECB rate setters next meet on April 3. The Fed's policy-setting Open Market Committee meets on Tuesday. The implied yield on the fed funds futures contract for April rose 2 basis points to 1.145 percent yesterday. A basis point is 0.01 percent. //www.quote.bloomberg.com