ECB downgrades forecasts for Eurozone growth

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The European Central Bank slashed its forecasts for economic growth in the 11-nation euro economy, in an official recognition that it will be affected by the US slowdown.

The bank said it expected the economy to grow by 2.2 to 2.8 per cent this year, compared with its forecast in December of 2.6 to 3.6 per cent.

It also raised its inflation target to 2.3 to 2.7 per cent ­ well above its 2 per cent ceiling ­ compared with a December forecast of 1.8 to 2.6 per cent.

Analysts said the revisions confirmed the message sent by ECB officials in recent months and made the prospects of another rate cut less likely.

Nick Stamenkovic, senior European strategist at Nomura International, said: "With forecasts of trend growth and inflation on an upward trend, it is difficult to see how they can now go for an early rate cut without losing credibility."

Despite the downward revision, the euro rose to its strongest level against the dollar for three weeks on the heels of a warning by a US manufacturing group about the strong dollar.

The National Association of Manufacturers said the dollar was "out of balance by 25 to 30 per cent" and was hurting industry by putting it at a competitive disadvantage against foreign producers.

Meanwhile, the pro-euro campaign in the UK was given a boost by a report from a leading US investment bank indicating that UK growth would be stronger inside the single currency. Lehman Brothers said GDP growth would be as much as £5bn larger a year by 2004 if the UK joined the euro. Its economists estimated that if it joined the euro, the UK's GDP growth would be 2.8 per cent in 2003 and 3.1 per cent in 2004. If it decided not to join, GDP growth would be 2.7 per cent in 2003 and 2.6 per cent in 2004.