Brussels, March 17 (Bloomberg) -- The European Central Bank has room to cut interest rates in case a war against Iraq deals a further blow to consumer and business confidence, the European Commission said. ``In the event of a conflict in Iraq, monetary policy could be used to respond to a possible collapse in confidence,'' Monetary Commissioner Pedro Solbes said in the commission's quarterly economic report. ``Economic growth in the euro area has turned out to be significantly weaker than anticipated.'' The U.S. gave the United Nations until today to sanction the use of force to disarm Iraq. The European Central Bank expects subdued economic growth and slowing inflation this year, suggesting the bank may reduce borrowing costs to spur growth.
The ECB, which cut its benchmark interest rate by a quarter point to 2.5 percent on March 6, is paying more attention to the ``core'' inflation rate -- which strips out rises in energy and food prices -- as the threat of war boosts oil prices. ``Core inflation is on a downward trend,'' Solbes said. Core inflation dipped below 2 percent in January for the first time since September 2001. Investors expect another reduction in the first half. The rate on the three-month euro deposit maturing in June fell five basis points today to 2.33 percent at 12:19 p.m. in Frankfurt, compared with a three-month money market rate of 2.56 percent. A basis point is 0.01 percentage point.
Complications
Another quarter point reduction by the bank, which aims to limit price increases to 2 percent in the dozen nations sharing the euro, would take rates in any euro country to the lowest since at least 1948. A reduction could be ``complicated'' by a surge in oil prices, now 37 percent higher than four months ago, the commission said. Europe's $7 trillion economy may contract this quarter, the commission predicts. Solbes has abandoned his 1.8 percent growth forecast this year and the commission says the region could enter a recession in the event of war. Falling equity markets and tumbling company profits are also impacting the economy, the commission said. On Wednesday last week the Dow Jones Stoxx 50 Index fell to its lowest level since January 1997. Business investment has been falling for two years. The euro's 22 percent gain against the dollar in the last 12 months is hurting the cost-competitiveness of producers in the region, the commission said. Governments, restricted by the stability and growth pact which limits deficits to 3 percent of gross domestic product, have ``not much room for maneuver'' to boost the economy through increasing spending or cutting taxes, Solbes said. //www.quote.bloomberg.com