European Central Bank President Mr Wim Duisenberg today kept markets guessing about an interest rate rise on the eve of a bank policy meeting, being hawkish on prices but stressing the recovery was still in doubt.
"Even though the appreciation of the euro will contribute to the easing of inflationary pressures, we will continue to monitor all developments," Mr Duisenberg told the European Parliament as he presented the bank's annual report.
Mr Duisenberg voiced his disappointment that inflation had averaged 2.5 per cent last year, missing the bank's two per cent target, and warned recent high wage agreements in the euro area had been a source of concern.
"Overall the outlook for price stability is now less benign than it was in November 2001 when we last adjusted the key ECB interest rates," he said.
The ECB has recently been cooling its anti-inflation rhetoric following a strong rally by the euro against the dollar, which will help to keep import prices in check, and as stockmarkets reeled in response to US accounting scandals.
Mr Duisenberg reiterated his confidence that an economic recovery would deliver growth by the end of the year in the euro zone in line with the bloc's long-term potential, which the ECB estimates at between two and 2.5 percent.
ECB staff economists forecast euro zone growth this year of between 0.9 and 1.5 per cent, rising to 2.1 - 3.1 per cent in 2003.
But they have lifted their prediction for inflation, to 2.1-2.5 per cent on average in 2002 and 1.3 - 2.5 per cent next year, implying the risk that the bank will miss its self-imposed definition of price stability for the third year on the trot.