Inflation is receding significantly in the euro zone and risks to the growth outlook remain, European Central Bank President Mr Wim Duisenberg said today.
"Economic growth in the first half of 2003 is likely to have been weak, very weak, and expectations for annual average growth of this year and 2004 have had to be scaled down," Mr Duisenberg told a European Parliament committee.
His testimony largely repeated his statement last Thursday when the central bank cut official interest rates by half a percentage point to record lows of 2 per cent.
Mr Duisenberg was making his quarterly appearance before the European Monetary Affairs Committee of parliament.
His comments firming market expectations for further rate cuts.
The ECB chief also spoke out firmly against deflation, saying the central bank would be equally concerned to ensure that receding price pressures do not bring the inflation rate done towards zero as it is about excessive inflation. He said the ECB would act to make sure that does not happen.
He underlined the ECB's review of its monetary policy strategy released last month, whereby the central bank said it aims to keep inflation below two percent but close to that level, was intended to send the message that the ECB is ready to prevent deflation from taking hold.
"So it does contain adequate, let me say, room for manoeuvre to fight deflation just as much as we would fight inflation if the forward-looking figures would indicate that it was open to that," Mr Duisenberg said.
A warning from the International Monetary Fund that Germany faces possible deflationary risks, where falling prices squelch demand creating a downward spiral, has raised concerns that receding inflation could prove dangerous for the euro zone.
But ECB officials have consistently said they see no risk of deflation in the euro zone economy, moreover they would act if needed to prevent it from taking hold.