Germany's six leading economic institutes today cut their growth forecast for the euro zone economy. They said they saw the single currency only appreciating slightly this year.
In their semi-annual report the institutes also said a half-point cut in the European Central Bank's key interest rate was justified. They predicted euro zone inflation would decline to on average 1.8 per cent in 2002 from 2.3 per cent this year.
"With growth slowing and with its main indicators pointing to a decrease in inflation in coming months the European Central Bank [ECB] had room to ease rates," the institutes said.
To avoid giving any false signals for price stability, there is only room for a slight loosening in monetary policy at the moment. The institutes believe an interest rate cut of 0.5 percentage point is justified.
The ECB has kept its key lending rate at 4.75 per cent since October despite interest rate cuts this year by some of the world's other major central banks. The bank next meets tomorrow amid expectations it will cut rates by 25 basis points - a quarter of one per cent.
The institutes' report said they now expected the euro zone's economy to expand at a rate of 2.6 per cent compared with a 2.8 per cent forecast they made last autumn.
They also predicted the euro zone would grow by 2.6 per cent in 2002. The euro would remain little changed after rising slightly against the dollar this year.