The European Central Bank (ECB) has left interest rates unchanged but its president, Mr Wim Duisenberg, hinted that falling inflation could make further rate cuts possible soon.
Speaking after a meeting of the ECB's Governing Council in Rome, Mr Duisenberg said that, although oil price volatility could affect price stability in the short term, the outlook for inflation was generally good.
"If the recent significant reduction in oil prices is sustained, inflation rates will in all likelihood fall below 2 per cent in the course of 2003 and remain in line with price stability thereafter; evidently, this presupposes that wage moderation prevails," he said. Mr Duisenberg said it was too soon to assess the impact of war in Iraq on the euro-zone economy but he repeated the ECB's view that economic growth would be sluggish throughout 2003, probably no more than 1 per cent. Despite uncertainty about the progress of the war in Iraq, Mr Duisenberg insisted that the ECB could change interest rates at any time.
"A change in the monetary policy stance is possible at any moment when our analysis leads us to decide on such a change - war or no war," he said.
Yesterday's meeting, the Governing Council's seventh outside the ECB's headquarters in Frankfurt, came as EU finance ministers prepare to meet this weekend in Athens. The ministers are expected to ask Mr Duisenberg, who is due to leave office in July, to remain in his post until December.
His likely successor as ECB president, the French central banker, Mr Jean-Claude Trichet, is embroiled in a court case over his alleged role in a banking scandal. The verdict in the case is not due until July 18th, leaving too little time for Mr Trichet's nomination to be approved in time for a smooth succession.
Mr Duisenberg was coy yesterday about how long he would stay in office but he left little doubt that he will agree to stay on until the end of the year.
The finance ministers must also decide who should succeed Ms Sirkka Hamalainen, a Finnish member of the ECB's executive, who leaves office next month. Most ministers are believed to favour the Austrian candidate, Ms Gertrude Tumpel-Gugerell, but some prefer the Belgian economist, Mr Paul De Grauwe.
The meeting is preceded today by a meeting of euro-zone finance ministers at a resort outside the Greek capital. The meeting is expected to focus on the impact of the war on Europe's economy and economic prospects for the rest of this year.
