Analisten speculeren op renteverlaging door ECB (en)

EUOBSERVER / BRUSSELS - European Central Bank chief Jean Claude Trichet i opted to keep eurozone benchmark interest rates at 2 per cent today (2 June) for the 25th month in a row, but declined to rule out future cuts, prompting speculation that the cost of borrowing could fall.

Mr Trichet said the low rates "provide considerable support to economic growth in the euro area" and predicted that "real economic growth will gradually improve over the period ahead".

The news came shortly after the European Commission forecast eurozone growth of just 0.1-0.5 per cent for the second quarter of 2005 and 0.2-0.6 per cent for quarter three, while noting that unemployment stood at 8.9 per cent in April.

But the ECB head did not explicitly rule out future interest rate cuts in his speech, in contrast to previous statements, while dodging media questions about the possibility of a downward move.

Analysts took the slight shift in rhetoric as a signal that the bank is positioning itself for a drop in the next few months in order to stimulate economic growth - in line with recent calls by Italy and the OECD.

"Our view is that growth will be weaker than the forecasts and inflation will be lower", HSBC economist Gwyn Hacche told EUobserver.

"They will continue to be reluctant to cut in the short-term, as rates are already low", he indicated, adding that a move toward 1.5 per cent might come in 2006 however.

The ECB's slight shift also tallies with Goldman Sachs' analysis of the post-French and Dutch referendum economic climate, as well as the recent plunge in German chancellor Gerhard Schroeder's popularity.

"Policies will be more clearly geared to please the domestic consumer", the report said. "They [member state governments] can certainly push for tax cuts targeted on households [and] higher public spending".

The study added that "if economic data continue to reinforce the need for a cut, the ECB may find itself in a weaker position to resist calls for an easier stance".

Euro rallies despite doomsday scenarios

Meanwhile, the euro gained almost a cent against the US dollar today, after sliding close to an eight month low in recent weeks, with analysts linking the rally to disappointing economic news from the US.

Mr Trichet did not comment on the recent euro drama, which saw some speculation that the Economic Monetary Union (EMU) could be broken up, saying he would not reply to "absurd" questions from the media.

Fresh rumours did the rounds on Thursday (2 June) after reports of a German parliament paper suggesting that EMU entry is not irreversible, while the Brussels-based Centre for European Policy Studies released a report entitled "EMU at risk".

"The risks for EMU are increasing not only because longer-term disequilibria become evident in fiscal and monetary policy, but also because serious divergences are now appearing within the euro area that threaten its long-term cohesiveness", the study noted.

The doomsday scenario has been given short shrift by several economists in recent days however.

"People see that setting up EMU was such a huge effort and the implications of it going belly-up are so great, that most economists would put the likelihood of it as very small", HSBC's Mr Hacche indicated.

"It's inconceivable on a five year view, but on a 10 or 20 year view anything could happen", he added.