Inflation worries have eased

The European Central Bank has taken modest action to shore up the slowing eurozone economy.

The bank - which sets interest rates for the 12 member countries of the euro - cut rates by a quarter-point to 2.5%.

Some analysts had been forecasting a more aggressive cut of a half percentage point, and traders immediately showed their disappointment by selling shares.

"It really smacks of a compromise... the markets won't be happy because it shows a lack of courage and the ECB council in an indecisive mood," said Adolf Rosenstock from Nomura International.

The announcement came on the same day that European finance and monetary affairs commissioner Pedro Solbes said Europe's 1.8% growth target for 2003 was "no longer realistic".

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The decision marks a change of strategy for ECB president Wim Duisenberg, who had previously argued that the ongoing uncertainties over a war with Iraq meant it was not a good time to cut rates.

Mr Duisenberg said that the modest cut had seemed the most "appropriate" but also stressed the bank would be ready to act "decisively" again if needs be.

Gloomy data

"We can only expect a very modest rate of economic growth this year given the geopolitical tensions and the associated rise in oil prices," Mr Duisenberg said at a press conference.

We can only expect a very modest rate of economic growth this year Wim Duisenberg

The eurozone grew by a mere 0.8% last year, compared to more robust growth of 1.4% the previous year.

"The first quarter started sluggishly and the second quarter was no better," Mr Duisenberg said, predicting average growth of 1% during 2003.

Recent figures have painted an increasingly bleak picture of the eurozone's economy as the threat of a war with Iraq undermines recovery hopes.

Unemployment across the 12 countries using the euro is at its highest level in almost two years while consumer confidence is at a five-year low.

Manufacturing industry continues to suffer while the services sector is shrinking.

Inflation concerns

The bank's prime concern is to fight inflation and Mr Duisenberg said the outlook for price stability had improved.

The bank's president predicted that inflation would drop below 2% this year, but warned that volatile oil prices will continue to create uncertainty.

Eurozone rates were last changed on 5 December 2002.

The Bank of England kept interest rates on hold at 3.75% earlier on Thursday, while the Swiss central bank cut rates by half a percentage point to just 0.75%.