The OECD said today that a euro zone recovery was under way but that next year's growth will be weaker than expected, keeping ECB interest rates on hold until mid-2004 unless the outlook weakens.
"Activity is likely to remain subdued in 2003, but could accelerate to potential of some 2 per cent in 2004," said the Paris-based Organisation for Economic Cooperation and Development in a special survey on the common currency bloc.
"Hence, with the exchange rate assumed to remain strong the OECD assumes the European Central bank to keep its policy rate on hold after a series of cuts in the spring of 2003 until mid-2004." it said.
The ECB governing council met in Frankfurt today to review policy and was expected to announce it had left rates unchanged at 2 per cent, their lowest level in the history of the monetary union, in a statement.
But the OECD said that the recovery faced a number of potential obstacles, including a weaker than expected rebound in the US and disappointing internal demand, and that the bank ought be prepared to cut again if the outlook darkened.
"If evidence of further weakening of economic activity surfaces, moderating inflation pressures further, the ECB should stand ready to reduce its key interest rates again," it said.
The OECD said euro zone inflation would ease to 1-1/2 per cent in 2004, while unemployment would peak this year.