The European Central Bank (ECB) says it is ready to take swift and decisive action again on interest rates if the economic fallout from a possible war in Iraq requires a further easing of monetary conditions in the 12-country euro zone.
"Monetary policy cannot address" the current geopolitical uncertainty, the ECB conceded in its March monthly report.
However, "depending on further developments which may change the medium-term outlook for price stability in any direction, the governing council stands ready to act decisively and in a timely manner", it said.
Only last week, the ECB cut its central "refi" refinancing rate to 2.5 per cent from 2.75 per cent in the hope that lower borrowing costs would give the euro-zone's anaemic economy a much-needed shot in the arm.
The world's financial markets were disappointed when the ECB pared back its key rates by only a quarter of a percentage point. But ECB president, Mr Wim Duisenberg, explicitly held the door open to further rate cuts by promising that the ECB would act "decisively and in a timely manner" if the situation warranted it.
His comments were reproduced almost word for word in the March monthly bulletin. The report said the world economy was expected to recover during the course of this year, but that there were substantial downside risks to the global growth outlook.
"The current moderate recovery of the global economy is projected to strengthen in the course of 2003, driven mainly by growth in the United States and in Asia excluding Japan," the ECB wrote. "However, the risks to the world economy are mainly on the downside and are substantial," it said.
Topping the list of those risks was the situation in Iraq, as well as the dangers arising from the huge current account deficit in the United States, the ECB said.
Regarding the outlook for the 12 countries that share the single currency, the ECB forecast that "the outlook for economic growth in the euro area in 2003 has weakened compared with previous expectations. This downward revision in expectations is especially due to the geopolitical tensions and the associated rise in oil prices."
However, once the prevailing uncertainties had diminished, "the most likely scenario is that real gross domestic product [GDP] in the euro area will gradually increase", the ECB said.
"Over time, the euro area economy should benefit both from a global economic recovery, raising demand for euro-zone exports, and from the prevailing low levels of interest rates. - (AFP)
