The European Central Bank emphasised yesterday the risks to euro-zone growth, amid mounting concern over the impact on the 12-nation bloc's faltering economy of a US-led war with Iraq.

The ECB warned that tensions in the Middle East could lead to "further turbulence in oil markets" that would slow the economy, increase unemployment and undermine consumer confidence.

Economists said the dove-ish tone of the comments pointed to the bank, which held rates steady at 2.75 per cent last week, cutting rates in April or May.

The ECB remarks follow comments on Thursday from Mr John Hurley, the Governor of the Central Bank and an ECB council member.

Mr Hurley said that prospects for the euro zone had "disimproved" since rates were last cut in December. His comments are seen as a signal that further rate cuts are contemplated. Similar comments have been made in recent days by Mr Matti Vanhala, the Finnish central bank governor.

The ECB said growth remained subdued at the turn of the year, but insisted in its February monthly bulletin that economic activity should pick up in the second half of the year "broadly in line with expectations".

Recent comments from other ECB governing council members, however, have cast doubt on the bank's projections, made in December, and its forecast that growth will return "to levels close to potential" of 2 to 2.5 per cent by the end of the year.

Yesterday the ECB said economists who took part in its quarterly survey of professional forecasters had cut their euro-zone growth forecast to 1.4 per cent from 1.8 per cent, but left inflation projections little changed. Private-sector economists believe the ECB has lost confidence in the growth projections it published just over 10 weeks ago and will cut them significantly.

New data will take account of the strong euro and a sharp shift in oil prices.

Mr Julian Callow of Credit Suisse First Boston estimates the growth forecast could be around 1.2 per cent, 0.4 percentage points lower than the December projection.

The ECB will not make public any forecasts until June.

Internal forecasts are updated quarterly. "The indications from officials suggest the December forecasts were overly optimistic," said Mr Jacques Cailloux of Barclays Capital.

Economists say "staff projections" play an increasingly prominent role in underpinning the bank's monetary policy.

So any significant revision could be expected to precipitate a rate change. One reason most analysts say the bank will cut again is down to the stronger euro, which has tightened monetary conditions, offsetting December's half-point cut.

The other is that with inflation likely to remain benign, the European Central Bank has more room to bolster growth.

Indeed, if growth weakens and unemployment rises, the bank will come under intense pressure to act. - (Financial Times Service)