EURO ZONE: The European Central Bank (ECB) has left interest rates on hold and hinted that there will be no rise in the cost of borrowing for a number of months.
ECB president Mr Wim Duisenberg expressed confidence that a recovery in the euro-zone economy was under way but said that inflation was likely to remain below the ECB's target rate this year.
"We are confident that we will be below but close to 2 per cent on average this year," he said.
Mr Duisenberg, who was speaking in Frankfurt after a meeting of the ECB's Governing Council, acknowledged that the recent rise in oil prices was a cause for concern. But he played down the likelihood that a rise in oil prices would disrupt the ECB's strategy for controlling inflation.
"If the recent rise in oil prices, which was significant, persists or even continues, there will obviously be risks to both inflation and output developments. But it's a big if," he said.
Oil prices cooled in the US last night as speculative funds and nervous traders took profits after rallying hard on concerns the escalating Middle East conflict could curb oil supplies to the West.
In volatile trade, May crude oil prices on the New York Mercantile Exchange jumped to a new six-month peak of $28.35 a barrel, before slipping back to $27.04, down 52 cents on the day.
Currency analysts interpreted Mr Duisenberg's remarks as an indication that the ECB will not raise interest rates in response to a temporary rise in oil prices.
Some suggested the next interest rate rise could come as late as September or October.
The euro surged briefly yesterday afternoon to $0.8855, its highest level for two weeks. The rise in the euro's value was partly a response to Mr Duisenberg's remarks but it also reflected contrasting economic data from the euro zone and the US.
Business confidence in the euro zone has spread from the manufacturing sector to the services sector, where the most recent survey records the highest level of confidence for 19 months. Services account for two-thirds of the euro zone's economy so the latest rise in confidence is an important sign of recovery.
Retail sales rose in January but, despite manufacturers' growing confidence, industrial output fell.
Mr Duisenberg said that economic recovery should give euro- zone governments an opportunity to implement unpopular reforms of labour markets and other parts of the economy that EU leaders discussed last month in Barcelona.
"If implemented vigorously, such reforms could increase the growth of real GDP and employment on a sustainable basis. Past improvements in the functioning of markets, together with wage moderation, have contributed to strong employment growth and a considerable reduction in unemployment. It is therefore clearly in the interest of all countries to continue to rigorously implement the agenda agreed in Lisbon and recently confirmed in Barcelona," he said.
Meanwhile, Mr Duisenberg said that EU finance ministers would propose a successor to ECB vice-president Mr Christian Noyer in the coming weeks. But he also said the issue of his own succession in 2003 was not a burning one and would probably be dealt with in the first half of next year.
