Berlin - The European Central Bank meets Thursday with the prospects of tepid economic growth and languid inflationary pressures likely to mean that rates in the 16-member eurozone will remain at their current historic lows possibly through to the middle of 2010. Signs that the eurozone economy is on track to recovery, combined with figures showing inflation edging back towards positive territory, are expected to result in the ECB this week raising its economic growth forecasts as set out in the bank's staff projections.
But said ING Bank economist Carsten Brzeski: "For the ECB, the important task will be to safeguard the momentum so that the recovery can really gain traction."
This means that the earliest that the ECB might move to hike borrowing costs is in March next year with the consensus in financial markets for the Frankfurt-based bank to launch a new rate-hiking cycle in June with a 25-basis-points increase.
A steady stream of forward-looking economic surveys has been signalling for several months that the recession in the eurozone had started to bottom out.
These have been backed up more recently by stronger-than-forecast hard economic data with the rise in consumer prices helping to allay fears of a prolonged period of Japanese-style deflation engulfing Europe.
Eurozone consumer prices climbed to minus 0.2 per cent this month, the European Union's statistics office Eurostat said in preliminary data released Monday. Inflation stood at a record low of minus 0.7 per cent in July.
On Friday the European Commission said its closely watched eurozone economic sentiment indicator (ESI) climbed for the fifth consecutive month in August to reach a 10-month high.
Eurozone industrial orders jumped more than forecast in June, figures released last week showed, rising by 3.1 per cent after slipping by 0.5 per cent in May, Eurostat said. Analysts had expected industrial order books would grow by 1.6 per cent in June.
But economists are still expecting only a very modest pickup in the currency bloc's economy in the runup to the end of 2009.
"This gives the ECB considerable room to move with a change in monetary policy delayed for sometime," said Commerzbank economist Christoph Weil.
A rise in energy prices and a pickup in global economic demand might have helped to renew inflationary pressures in the eurozone.
But economists believe the buildup in industrial capacity in the region's economy along with weak credit growth and price competition are likely to help keep consumer prices in check for sometime.
Meanwhile, overhanging the eurozone's economic outlook is the threat of escalating unemployment as the global recession slowly starts to catch up with the region's labour market.
Rising job fears would also undercut private consumption, which has been a major driving force behind the improvement in the region's economy.
The European Commission has already forecast the unemployment rate in the eurozone will climb to 11.5 per cent in 2009 from 9.4 per cent in June.
Indeed, after the dramatic contraction in the eurozone economy at the start of the year as the global financial crisis turned into an economic crisis, economists predict that the currency bloc will shrink by about 4 per cent this year.
Moreover, they believe it will be lucky to chalk up a growth rate next year of 1 per cent.
This is despite the eurozone's two biggest economies - Germany and France - climbing out of recession in the second quarter.
Economists now expect the currency bloc will emerge from the downturn during the third quarter after almost returning to a growth path in the three months to the end of June. The eurozone contracted by 0.1 per cent in the second quarter.
