The prospect of an imminent rise in European interest rates dimmed further yesterday as more signs emerged of fragility in the euro zone economic recovery.
A survey of analysts and institutional investors by the ZEW institute in Germany showed a dramatic drop in sentiment, and ZEW said economic recovery in the euro zone's largest economy had been stopped in its tracks.
"We expect rates to stay steady for months, but the next move will be down.
"The ECB does not see it that way yet because the data still does not support this view. But we think the bank is in for a surprise," said Mr Menno Middeldorp, an analyst at Rabobank in Utrecht.
The ECB runs its monetary policy with a limit of 2 per cent for consumer price inflation as its number one priority.
Its concerns on this front will have been eased by data published yesterday, which showed French and Spanish inflation fell last month.
That reinforced forecasts by the European Union's statistics office Eurostat that consumer prices stayed under the ECB limit in July.
French prices dipped 0.2 per cent month-on-month, while in Spain they declined an unexpectedly large 0.7 percent.
Core prices did not fall, but they did stop rising and analysts said this stability would help the ECB keep rates low.
"This supports other evidence that core inflation in the euro area has peaked, even if it remains high and is not moderating especially quickly," said CSFB's Mr Neville Hill.
Subdued activity is softening price pressures and forward-looking indicators have sounded a clear warning of a hesitation in the upswing.
Such setbacks are reviving fears of a double-dip recession in Germany as well as in the United States, where conditions if anything are even more fragile.
ZEW is seen as a front-runner for the more influential Ifo business barometer, which takes the pulse of more than 7,000 German companies and has a good record of predicting turns in the business cycle of the euro zone's largest economy.
Its survey for this month is due out on August 28th. - (Reuters)
