Prospects for the euro-zone economy are improving, allowing interest rates to remain on hold, European Central Bank President Jean-Claude Trichet said yesterday.

Trichet said the central bank remained watchful but was not preparing the financial markets for either higher or lower borrowing costs. "We feel, given our judgment on inflationary pressures and on price stability in the medium term, that these rates are exactly what we need," he told French radio station Europe 1 a day after the ECB left its key interest rate unchanged at 2 per cent for the 26th month in a row.

"I am not preparing the markets, in the name of the Governing Council, for a fall in rates. I am not preparing them for a rise in rates. They are currently, given all the information we have at our disposal, appropriate. But we remain vigilant," he said.

Trichet said there were signs of improvement in euro-zone economic activity. The ECB is predicting an upturn in the second half of the year.

"We have to remain very prudent, of course . . . but it is a fact that we have signals that have been going in the right direction, I'm talking at the European level," he said.

"The last indications we have had in studies in industry, on the overall economy, have gone rather in the right direction these past two months, June and July. So we will see." Most analysts believe the ECB will leave rates on hold until well into next year as it awaits firm evidence that the economy in the 12-nation zone, which hit a soft patch in the second quarter, is back on a firmer footing.

Rainer Guntermann, an economist for Dresdner Kleinwort Wasserstein, said although Trichet's interview struck a similar tone to previous ECB statements, greater hawkishness might be apparent when Trichet holds his next news conference on September 1st. A fuller statement on the Governing Council's thinking will be included in the ECB's monthly bulletin next Thursday. - (Reuters)