Confident Trichet rejects calls for interest rate cuts

European Central Bank (ECB)president Jean-Claude Trichet rebuffed pressure to cut interest rates yesterday, expressing confidence that the euro-zone economy is on track for a gradual and modest recovery with inflation in check.

Presenting the ECB's annual report, he acknowledged that recent economic data have been mixed but he expressed no concern that the economic recovery may stutter, despite the pressure from Germany and France for lower rates.

"The evidence available continues to indicate that the moderate recovery of euro area real GDP growth that started in the second half of 2003 has continued in 2004," he told the European parliament's monetary affairs committee.

"Although recently released economic indicators have been mixed, we remain confident in our expectation of a gradual recovery and continued, though modest, real GDP growth in the euro area." Trichet's remarks were in line with his message to top industrial nations last weekend at the International Monetary Fund in Washington.

The ECB has left the door open to a monetary easing if its slow recovery scenario does not materialise. But ECB policymakers have consistently said that official euro-zone interest rates at 2 per cent are low enough to support recovery. They next meet on May 6th.

In his testimony to the European parliament committee, Mr Trichet gave no indication that the ECB was wavering in its evaluation of recovery prospects - even over its biggest worry of flagging consumer confidence and low household spending.

"On the domestic front, favourable financing conditions and an improvement in corporate earnings should continue to support investment in the euro area. Growth in real disposable income should sustain private consumption," Mr Trichet told the committee.

As for price stability - defined as consumer price gains just below 2 per cent - Mr Trichet said there is little threat of short-term upward pressure.

"During the coming months, annual inflation rates will edge up, mainly on account of energy prices and increases in indirect taxes in a number of countries in the euro area," he said.

"The annual report and his testimony criticised European governments for violating the fiscal deficit rules of the Stability and Growth Pact, which underpins monetary union.

"It is crucial that confidence in the solidity of public finances ... be maintained," Mr Trichet said.

The ECB has consistently warned that without major structural reforms and budget discipline, the euro zone is condemned to a slow pace of growth about which monetary policy can do little. - (Reuters)