Mr Jean-Claude Trichet, the president of the European Central Bank (ECB), warned yesterday that ballooning US debt and the strength of the euro were the biggest threats to long-term euro-zone growth.

He said the ECB remained concerned that the "sustainability of global economic growth" might be "undermined by external imbalances" in some economies, a reference to the huge US current account deficit.

Worries over the US current account deficit have sent the dollar sharply lower against the euro, which economists fear could stifle the fragile export-led recovery now under way in the 12-state bloc.

However, in the short term, the ECB chief painted an optimistic picture, signalling that interest rates could be held at a record low of 2 per cent for several months as growth in the euro area picks up steam while inflation remains benign.

Speaking after the ECB's governing council left rates on hold for the sixth month running, Mr Trichet repeated that the bank's monetary stance was "appropriate to preserve price stability".

He said the ECB expected inflation to hover around 2 per cent, its price stability ceiling, over coming months, but should see a gradual, though limited, decline later next year.

The past appreciation of the euro and moderate wage rises should dampen price pressures over time, he added.

Mr Trichet declined to elaborate on the ECB's inflation and growth projections that were discussed yesterday but central bankers indicated that inflation next year would be 1.8-1.9 per cent and growth 1.7 per cent.

Bankers said the projections for 2005 would put inflation "closer to 1.5 than 2 per cent" and put growth in the region of 2.3-2.4 per cent. Such an outcome, according to economists, would signal steady rates for a prolonged period.

Mr Trichet said the latest data confirmed that the euro-zone upturn had started and that confidence had strengthened further.

He said a gradual recovery could be expected over the next few quarters, "leading to a broader and stronger upswing" in the course of 2004 and 2005.

Mr Trichet said the euro-zone had the capital, savings and human resources to fuel an economic recovery but was still dogged by fragile confidence - the main ingredient for stronger growth.

He said domestic demand, Europe's main weakness, should start to improve.

Mr Trichet again stressed that the suspension of the European Union's budget deficit rules "risked undermining the credibility" of the EU institutional framework and "confidence in sound public finances".

He said a credible fiscal framework was vital for stability and growth and called on governments to live up to their responsibilities. - (Financial Times Service)