FRANKFURT, May 15 - The European Central Bank on Thursday said the outlook for euro zone inflation was restrained and growth would not pick up until later this year before accelerating in 2004. In a close repeat of last week's policy statement, the bank said in the editorial section of its May monthly bulletin: "The risks to price stability over the medium term remain limited." "Looking ahead a gradual strengthening of real GDP growth is expected to start later in 2003 and to gather more pace in the course of next year," it said.
However, events might have overtaken the ECB's assessment, given the painful surprise earlier in the day with weaker-than-expected first quarter growth in several euro zone countries, which has sparked recession fears. "It now looks as though euro zone GDP fell in the first quarter and may well have fallen in the second quarter as well. So the chance that Europe is in recession has materially increased. The ECB almost certainly did not know that," said Jonathan Hoffman at RBS Financial Markets. Germany, Italy and the Netherlands -- accounting for more than half euro zone economic activity -- all reported output contracted in the first three months of this year. The dire news increased the chances of a swift rate cut, Hoffman said. "I expect to see ECB council members increasingly preparing for a cut on June the 5th."
Euro zone first quarter growth figures are scheduled for release at 1000 GMT. Short-dated euro zone government bond yields did not move on the ECB's report, which was an almost word-for-word repeat of its May 8 statement when it left its benchmark interest rate unchanged at 2.50 percent, saying it needed more information to assess where the economy was heading. June Euribor futures, betting on euro zone interest rates, were up 1.5 bps at 97.755, pricing in more than a 70-percent chance of a quarter-point rate cut by end June.
REASONS FOR RECOVERY
The bank repeated that the monetary environment remains conducive to economic growth, with the end of the Iraqi war diminishing important downside risks to recovery. But it said risks remain, such as uncertainty over the corporate sector, the SARS virus and macroeconomic imbalances. Since then, however, ECB policymakers have been giving signals they favour further rate cuts, leading most observers to believe the central bank will ease the reins at its June meeting, possibly even by a hefty 50 basis points. The euro zone recovery would not speed up before the end of the year, and it was not even certain whether the single currency bloc would reach its two to 2.5 percent potential output growth rate next year, ECB board member Eugenio Domingo Solans told reporters on Wednesday.
And Bundesbank President Ernst Welteke told in an interview on Tuesday that there was room for an ECB rate cut if the strong euro and lower oil prices proved sustainable. Inflation is also obliging. Euro zone inflation came to within a hair's width of the ECB's two percent pain threshold last month, falling to 2.1 percent from 2.4 percent in March, a first estimate showed.//