The European Central Bank yesterday said there was increasing evidence of a revival in the eurozone economy, reducing the prospect of further rate cuts to support growth.
The ECB also said that the outlook for Europe's beleaguered banking sector was looking brighter, with some of the weaker banks returning to profitability.
In its monthly bulletin, the ECB said it saw "increasing reasons" to expect a gradual pick-up in economic activity in the eurozone in the second half of this year, with a firmer recovery feeding through in 2004.
The current level of monetary policy was appropriate, the ECB said. Economists said the ECB's cautious optimism suggested that additional rate cuts were becoming less likely.
"The ECB appears to be trying to dampen any expectations of easier monetary policy," said Mr Ray Attrill, director of research at 4Cast, the economic consultancy. "They are increasingly laying the responsibility for growth at the door of the politicians, saying that only structural reform can deliver more than a modest recovery."
Yesterday Mr Matti Vanhala, a member of the ECB's governing council and head of the Finnish central bank, said Europe's politicians should not rely too heavily on the revival in the US economy to support growth. The US revival, he said, was "not going to help Europe very far unless we somehow get some flexibility into our own markets and institutions".
Mr George Magnus, global economist at UBS, said there were signs that tax cuts in Germany would boost growth next year. The bank has revised upwards its 2004 forecast for German growth from 0.5 to 1 per cent.
Although the ECB said risks remained for the euro zone, its comment that these risks "may have slightly declined recently". At the same time the ECB remains highly confident that inflation will remain below 2 per cent over the medium term.
The bank last lowered rates by half a percentage point in early June, to a historic low of 2 per cent, and has since said rates were appropriate.
Recent economic data have now begun to indicate that the euro zone is now headed for recovery later in the year. However, given this recovery is still highly fragile and subdued, many economists continue to think the ECB has scope for another rate cut towards the end of the year.
Weaker-than-expected industrial June output data from Germany yesterday, for instance, underscored the fragility of the gradual turnaround in the eurozone's economy. The ECB also said it thought Europe's beleaguered banking sector may have weathered the worst impact of the economic downturn.
The Bank of England decided to leave interest rates on hold yesterday at 3.5 per cent, on the back of strong consumer borrowing and retail sales. The decision follows July's 8-1 vote by members of the bank's monetary policy committee to cut rates by a quarter-point to 3.5 per cent, their lowest level in almost five decades.
