The outlook for the euro zone remains positive, European Central Bank president Mr Wim Duisenberg said in the Bank's annual report. "There is good reason for realistic optimism regarding the prospects for the euro zone," he said, noting that one of the advantages of the single currency was that the euro area was probably less vulnerable than in the past to external shocks. The head of the ECB has been under considerable pressure in recent months to cut interest rates in response to the US-led global economic downturn.

Mr Duisenberg defended his refusal to cut rates on the grounds that inflationary pressures in the euro zone were more acute than people realised. In a foreword to the report, he said the best way to achieve confidence in the euro was to build a track record of low inflation. Unfortunately, high oil prices and continuing weakness in the euro have dogged the Bank's plans.

The ECB recently said it expected an overshoot of the 2 per cent annual inflation target for the second year in a row. The Bank warned inflation might not dip below 2 per cent again until early next year.

The International Monetary Fund recently challenged the ECB's refusal to ease monetary conditions, saying it had made the euro zone "part of the problem" of slowing global growth. Though the ECB raised interest rates by a cumulative 1.75 percentage points between November 1999 and October 2000, the euro's weakness wiped out much of that tightening.