The European Central Bank (ECB) signalled yesterday it was growing more confident about the prospects of recovery in the euro zone and hinted that interest rates were likely to remain on hold for some time.
Outgoing ECB president Mr Wim Duisenberg said the latest indicators were consistent with a modest upturn in the second half of this year. He said there were growing signs "economic activity had firmed".
Mr Duisenberg's more upbeat assessment of the economic outlook came after the ECB's governing council kept rates unchanged at a post-war low of 2 per cent for the fourth month running, as expected.
The ECB chief, presiding over his farewell press conference, said the historically low level of interest rates "remains appropriate" - the bank's way of saying that no rate move is likely for the next few months. Economists said the ECB was in a wait-and-see mode, although several suggested the bank's statement showed signs of a compromise between the hawkish and doveish camps on the governing council.
Mr Duisenberg, who will be succeeded in November by Bank of France governor Mr Jean-Claude Trichet, said that, in the short term, the risks to the growth outlook were "broadly balanced". On money supply, he said the accumulation of excess liquidity was not a cause for concern given sluggish growth.
"However, if it were to persist in conjunction with a significant strengthening of economic activity, it would lead to inflationary pressures," he said.
Earlier this week, Mr Otmar Issing, the bank's chief economist, said the high level of liquidity in the euro zone represented a threat to price stability once growth started to pick up.
Economists believe there is a tussle on the governing council between monetarists, who believe rates are now low enough to support a rebound, and more pragmatic members, who want to keep the door open for further easing should growth disappoint.
Mr Duisenberg insisted the euro, which climbed above $1.17 this week - its highest level since mid-June - had had little impact on the ECB's policymaking.
