The European Central Bank (ECB), headed by Mr Wim Duisenberg, expressed optimism yesterday about the outlook for the euro zone economy, saying output should increase in the second half of the year and inflation should remain under control.

"There appears to be increasing evidence that the contraction of industrial activity came to an end at the start of the second quarter of 1999, thus supporting the view that overall output growth will recover in the course of this year," the ECB said in its August report.

However, the ECB cautioned that the euro zone's improving performance was unlikely to lower unemployment soon. "On the contrary, the most recent labour market developments are only just starting to show the effects of the slowdown in economic activity at the end of 1998," the ECB said.

Unemployment in the 11-nation euro zone stood at 10.3 per cent of the workforce in June, the latest month that figures were available. It has been stuck at that level since last March.

Oil price increases and the euro's weakness against other currencies this year would put some upward pressure on inflation, but this would be offset by intense price competition in some business sectors, the ECB said.

Even though the annual growth rate of credit to the private sector rose from 10.5 per cent in May to 10.9 per cent in June, the ECB said money supply trends as a whole did not pose an inflationary threat. However, the central bank said it would monitor monetary and credit aggregates because it appeared euro zone residents faced no liquidity constraints.

The central bank has left its benchmark interest rate at 2.5 per cent since last April. Most economists believe it will not raise rates when its policy-making governing council meets after the summer break on August 26th.