The European Central Bank (ECB) has cut interest rates by 0.25 of a percentage point. The reduction was smaller than the markets expected but ECB president Mr Wim Duisenberg explicitly left open the possibility of further cuts in the near future.
Speaking after a meeting of the ECB's governing council in Frankfurt, Mr Duisenberg insisted that the size of the rate cut was appropriate "in the current uncertain circumstances".
He said that the prospect of war in Iraq did not influence the ECB's decision but he acknowledged that events in the Gulf could influence further interest rate changes.
"The consequences of a war can go in many directions and so can the decisions of the governing council," he said.
Mr Duisenberg said the prospect of war had dampened economic growth in the euro zone. He said the uncertainty caused by the crisis over Iraq made it almost impossible to predict future economic developments.
"Any judgment on future developments is overshadowed at present by the geopolitical tensions and their potential resolution. Monetary policy cannot address this kind of uncertainty. Depending on further developments, the governing council stands ready to act decisively and in a timely manner," he said.
Mr Duisenberg declined to be drawn on possible divisions within the governing council over yesterday's decision. He dismissed complaints from international economists and, most recently, the Governor of the Bank of England, Sir Edward George, that the ECB's monetary policy was not sufficiently growth orientated.
"Overall, ECB key interest rates have reached levels which are very low. On the basis of the currently available information, this policy stance, while contributing to the preservation of price stability over the medium term, provides some counterbalance to the various factors which are currently having an adverse effect on economic activity," he said.
Last month, Mr Duisenberg explained the ECB's reluctance to cut interest rates on the basis that any move could be drowned in "a sea of uncertainty". He acknowledged that there was "an element of psychology" in yesterday's cut but insisted that the decision was based on a new assessment of economic conditions.
The ECB has revised downwards its prediction for economic growth in the euro zone for 2003 to just 1 per cent and Mr Duisenberg said he expects unemployment to rise further this year. But he insisted that the level of interest rates was not the main determining factor behind economic growth.
"The main driving force has to come from the restoration of confidence," he said.
Mr Duisenberg blamed oil prices for a slight rise in inflation to 2.3 per cent in February but he predicted that, once oil markets become more stable, inflation will fall.
"If oil prices moderate in the future, as currently expected by markets, the most likely outcome will be that inflation rates will fall below 2 per cent in the course of 2003 and remain clearly at levels in line with price stability thereafter," he said.
ECB vice-president Mr Lucas Papademos dismissed newspaper reports suggesting tensions between himself and the ECB's chief economist, Dr Ottmar Issing. But Mr Papademos acknowledged that the two men do not see eye to eye on everything.
"It's true that occasionally we disagree. Sometimes he prefers Bordeaux and I prefer Burgundy. This can complicate the choice of wine at our lunch," he said.
