The European Central Bank (ECB) has dented hopes of an early cut in interest rates, insisting that the euro-zone's economic recovery remains on track.
Speaking in Frankfurt after yesterday's decision to leave rates at 2 per cent, the ECB president, Mr Jean-Claude Trichet, said there was no evidence to suggest that last month's terrorist attacks in Madrid would have a major negative impact on the European economy.
"On balance, there is currently no evidence challenging the assessment of continued, though modest, real GDP growth in the euro area over the short term. More fundamentally, the conditions remain in place for the recovery to continue in 2004 and to strengthen over time," he said.
Although Mr Trichet declined to say that the present level of interest rates was "appropriate", a formulation usually used to suggest that no change is likely, he avoided offering any encouragement to those who want an early rate cut.
"We have not changed our assessment that the current stance of monetary policy remains in line with the maintenance of price stability over the medium term," he said.
Mr Trichet himself fuelled speculation about a rate cut last week when he suggested that the ECB might have to adjust its monetary policy if consumers did not start spending more. He predicted yesterday that consumer confidence would improve in the coming months as the recovery gathered pace.
"Growth in real disposable income should lead to increased spending, in particular because there are no financial constraints for households which would pose obstacles to higher expenditure. Over time this should also be fostered by an improvement in employment and employment expectations," he said.
European politicians, particularly in Germany and France, the EU's biggest economies, have been calling for months for a cut in interest rates. Germany's Ifo business confidence survey fell for the second consecutive month in March. Analysts usually interpret three consecutive falls as evidence that any recovery trend has been halted.
The mixed signals from the ECB over the past week caused some confusion in the markets. The majority of analysts had not expected a rate cut at yesterday's meeting. However, they had anticipated that Mr Trichet would indicate that a reduction could be in prospect in the months ahead, if the euro-zone recovery does not gather pace.
Mr Trichet appeared to be dampening that expectation and suggesting that rates will be on hold for the time being, commented Mr John Moclair of Bank of Ireland Global Markets. "This would appear to be a change in tack from the comments that individual board members would have made in the past few weeks," he added, and would fuel speculation that the board is split on interest rate policy.
Mr Trichet expressed concern about rising budget deficits in some member-states, warning that promises made in stability programmes were in peril.
"We strongly urge governments to take corrective action in a timely and sustained fashion, where and when necessary," he said.
The ECB president praised the commitment made by EU leaders last week to speed up structural reforms as part of the Lisbon Agenda to make the EU the world's most competitive economy by 2010. "Ending the political uncertainty and delays surrounding the implementation of sustainable fiscal policies and effective structural reforms would indeed support private sector confidence, which would add momentum to the economic recovery in the euro area, given the supportive stance of monetary policy," he said.
Today market attention moves away from the ECB to US employment figures for last month. Data on manufacturing employment and benefit claimants yesterday encouraged hopes that the March employment figures will finally show a strong pick-up in job numbers. Increases in recent months have been surprisingly small. This would be a substantial increase on February's lacklustre 21,000 rise.
(Additional reporting: news agencies)
