FRANKFURT, March 13: The European Central Bank raised the prospect of further cuts in interest rates on Thursday, warning in its monthly report that economic growth in the 12-member eurozone will remain “subdued” and pointing to signs of reduced inflation.

“The outlook for price stability in the medium term has improved in recent months, owing in particular to the subdued pace of economic growth and the appreciation of the exchange rate of the euro,” the ECB said in its March bulletin.

The release of the report follows the bank’s decision a week ago to trim borrowing costs by 25 basis points, bringing its benchmark refinancing rate down to 2.5 per cent.

This was the ECB’s second rate cut in four months with the bank having cut the refinancing rate by 50 basis points last December.

After predicting that the ECB would lower rates also by the more dramatic 50 basis points last week, economists are expecting the bank to again reduced rates in the coming months.

The ECB’s cut in rates coincided with a string of monetary moves by European central banks aimed at shoring up business confidence in the face of growing economic uncertainty caused by the threat of a US-led war with Iraq.

According to the March monthly report economic activity in the eurozone remained sluggish as the 12-member currency bloc entered the new year.

“In the light of recent developments, the outlook for economic growth in the euro area in 2003 has weakened compared with previous expectations,” the monthly report said.

“This downward revision in expectations is especially due to the geopolitical tensions and the associated rise in oil prices,” it said.

While the ECB report argues that tensions over Iraq make it difficult to forecast short-term developments in inflation, it says that once these tensions have eased, more fundamental factors should dominate price developments.

In particular, the report says this includes the euro, which this week hit another four-year high against the dollar and at one point appeared to be pushing towards 1.11 dollars.

Apart from unnerving eurozone exporters, economists say the euro’s ascent has also largely cancelled out the benefits of the ECB’s rate cuts. This has helped to fuel market expectations that another ECB rate cut is inevitable.

“If oil prices moderate in the future, as currently expected by markets, the most likely outcome will be that inflation rates will fall below two per cent in the course of 2003 and remain clearly at levels in line with price stability thereafter,” the monthly report said. This is also in line with the ECB’s annual inflation target of two per cent.

With oil prices having surged on the back of fears of a new Gulf War, eurozone inflation rate edged up to 2.3 per cent in February from 2.2 per cent in the previous month.—dpa