The ECB is keen not to snuff out Europe's sputtering recovery

Borrowing costs have remained on hold amid concerns about the strength of economic growth in the 12 nations sharing the euro, analysts said.

Despite signs of pick-up, labour markets and consumer demand remain sluggish, while firms are eyeing cost- cutting measures such as redundancies.

High oil prices, meanwhile, have put upward pressure on the inflation rate.

Waiting game

Surveys of economists have shown that the majority expect borrowing costs to stay at 2% in coming months, with an increase of a quarter of a percentage point predicted some time in the second half of the year.

However, the chance of an interest rate cut have not been ruled out, especially with the euro's continuing strength against the dollar and with ECB president Jean-Claude Trichet saying that price concerns were subsiding.

Inflation is benign and growth is not so great so this gives some hope that rates will stay low David Brown, Bear Stearns

"While short term inflationary pressures persist they have recently diminished somewhat, mainly due to the decline in oil prices from the peaks seen in October," Mr Trichet told a news conference on Thursday.

He added that the "downside risk to the economic outlook coming from oil price... has diminished somewhat over recent weeks".

Mr Trichet also reiterated the ECB's view that sharp gains "by the euro are unwelcome and undesirable for economic growth".

Analysts scoured the ECB's and Mr Trichet's comments for clues about future interest rate policy.

"The comments are well hedged but if you read between the lines there is a bit of a softer element, especially what they say about the inflation outlook," said David Brown of Bear Stearns in London.

"Inflation is benign and growth is not so great so this gives some hope that rates will stay low."

Mixed signals?

Data coming out of Germany on Thursday underlined the problems facing European policy makers.

While Germany's economy expanded by 1.7% in 2004, growth was driven by export sales and lost some of its momentum in the last three months of the year.

The strength of the euro is threatening to dampen foreign demand in 2005, and current domestic consumption is not strong enough to take up the slack.

Inflation in the eurozone, however, is estimated at about 2.3% in December, above ECB guidelines of 2%.

"We still have mixed signals," Mr Trichet said. "Some are going in thedirection of modest growth, others going in the other direction."

Mr Trichet has remained upbeat about prospects for the region over the past couple of months, and inflation is expected to drop below 2% later in 2005.

That may provide the room needed for a rate cut, despite the ECB forecasting economic growth in the eurozone of 1.9% in 2005, analysts said.