FRANKFURT, July 17 - The European Central Bank said on Thursday euro zone interest rates were appropriate and it had made a significant contribution to boost growth by cutting borrowing costs to historic lows. The inflation outlook is favourable and the economy should gradually improve this year, the central bank said in its July monthly bulletin, which closely matched its message after it left its benchmark rate unchanged at 2.00 percent last week.
"The Governing Council's assessment (is) that the current monetary policy stance is appropriate in view of the favourable outlook for price stability over the medium term," the ECB said. "Monetary policy has made a significant contribution to improving the conditions for a recovery in economic growth. Now, other policy-makers also have to make their contributions." Analysts said the report supported expectations the ECB would leave rates untouched until the summer was over, though they did not rule out further monetary easing later this year. "What is striking is that the bank is not ready to lower rates further, as it says monetary policy has made a significant contribution with rates at such low levels " said Michael Schubert, an economist at Commerzbank in Frankfurt.
But he added his bank was still looking for a 25 basis points rate cut in September or October, to help prevent inflation from falling too low next year. The ECB aims to keep inflation below but close to 2.0 percent over the medium term. Financial markets, which have been scaling back their bets on a quick rate easing this year, barely moved on the report. They now see a roughly 30 percent chance of a quarter-point rate cut by September, which weeks ago was almost fully priced in. But they are more confident of a cut later, pricing in more than a 50/50 chance of a quarter-point cut by December.
SET TO RECOVER
With financial markets reviving in anticipation of a global recovery, and some first signs business sentiment may be improving, the ECB may find the economy does not need even cheaper cash when it next decides on policy in September. It is also due to discuss interest rates on July 31 but no news conference is scheduled for that day and analysts widely hold the view it will not change rates on that occasion. The ECB said low inflation, boosting consumer spending power, low interest rates and a global recovery would all push growth in the second half of this year and in 2004, while inflation would remain tame through a strong euro and sluggish demand. But not all risks had disappeared. The ECB hinted the large U.S. current account deficit remained a risk by pointing to global structural imbalances, and also said euro zone companies might need further restructuring to boost productivity.//