ECB hints at rate cut as concern mounts

The European Central Bank hinted yesterday it is preparing to join global efforts to ward off recession by cutting interest rates in the 12-member eurozone at its next meeting.

The bank admitted Europe's economies have slowed more sharply than expected.

"Risks relating to the outlook for growth in the second half of the year remain sizeable," it warned in its monthly bulletin.

The ECB - which has reduced rates only once this year, compared with six cuts by the US Federal Reserve and four by the Bank of England - has consistently resisted pressure to cut rates, pinning its hopes on eurozone growth remaining strong.

But the bulletin struck a markedly more pessimistic note, warning that the global slump has significantly affected euro area exports and investment, while consumer demand has been weaker than expected.

"The ECB's rhetoric has been quite hawkish, but today's report is a good deal more dovish in tone. So the reality gap is closing ... and that is very constructive," said Giles Keating, chief economist at Credit Suisse First Boston in London.

News yesterday that the Italian economy shrank by 0.1% in the second quarter of the year underlined the ECB's concerns that the downturn is sending Europe's economies into reverse. Italy is the first of the major eurozone countries to release its GDP data, and the gloomy picture is likely to be reinforced by other countries' data.

Germany, the eurozone's largest economy, is expected to show falling output when its second-quarter figures are released a week before the ECB's August 30 meeting.

Inflation in the eurozone fell to 3% in June from 3.4% in May, confirming the ECB's belief that earlier price rises were due to temporary factors.

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