FRANKFURT, Feb 11: The European Central Bank is set to cut its forecast for euro-zone growth again amid sagging business confidence, fears of a possible war in Iraq, a soaring euro and signs of a renewed recession in Germany, an ECB council member said in a newspaper interview on Tuesday.

The outlook for economic activity in the single currency area has changed since the guardian of the euro drew up its last forecasts 10 weeks ago, the head of the central bank of Finland, Matti Vanhala, told the Financial Times.

“Clearly we are drifting away from the forecasts” made in December, Vanhala said.

“The economy looks weaker... the indicators point to a deteriorating outlook,” he said. “This is creating uncertainty about the numbers we saw in December.”

In December, the ECB already slashed its growth estimate this year for the 12-country euro zone to 1.1-2.1 per cent, a full percentage point lower than the previous forecast of 2.1-3.1 per cent made in June.

The ECB also sliced half a percentage point off its key interest rates at its monthly policy-setting meeting in December in a move it explicitly hoped would help boost confidence.

Cutting the growth forecast again would therefore bolster the case for further monetary policy easing.

At its latest meeting last week, the ECB’s governing council held its central “refi” refinancing rate steady at 2.75 per cent, arguing that uncertainty about the situation in Iraq meant it would not be wise to change rates again just yet.

But the bank appears to be growing increasingly pessimistic about the growth outlook.

On Thursday, President Wim Duisenberg said that while the ECB “baseline scenario” of a pick-up in activity towards the end of the year remains unchanged, “the risks to the downside have increased. We will have new forecasts internally in the course of this spring, and I will not be surprised if they have to be slightly revised downwards.”—AFP