FRANKFURT, Oct 9 - The euro zone economy showed signs of strengthening in the third quarter and interest rates are at historically low levels which favour growth, the European Central Bank said on Thursday. The central bank's monthly bulletin was largely a repeat of the ECB Governing Council's statement on October 2 when policymakers held official interest rates steady at two percent for the fourth straight month. "The latest data and information are consistent with a moderate pickup in activity in the second half. Survey and production data indicate that economic activity might have firmed somewhat in the third quarter," it said in the bulletin's editorial. September confidence indicators point to some improvement in expectations. The economic upturn should gradually strengthen in 2004, supported by a building global recovery that will create demand for exports and counteracting the effect of worsening price competitiveness, the ECB said.
Euro appreciation improves the terms of trade in the single currency region, which in turn helps disposable income by keeping import prices low and "should facilitate a pickup in income growth," the ECB said. While the central bank made a similar statement on October 2, at that time it referred only to the impact of past currency strength not to the current increase. Now it implies that it sees the surging currency, which is flirting with record highs, as favouring a pickup in domestic spending and it did not cite the currency strength as threatening growth. "Risks to the main scenario of gradual recovery appear to be broadly balanced," the ECB said, though it added that uncertainty remains at the global level due to structural problems and persistent macro economic imbalances in major industrialised nations -- its code for the huge U.S. trade deficit and budget deficits. On the inflation outlook, the ECB repeated its view that price gains should hover around two percent for the remainder of this year with euro strength helping import prices but there will be higher food costs due to the drought. For next year, inflation is expected to fall below two percent, the ECB's ceiling for price gains, and remain in line with price stability, it said.//