The European Central Bank has signalled that it will not bow easily to pressure for cuts in eurozone interest rates, even as fresh data showed economic growth had again lost momentum, especially in services.
Economic activity in the 15-country region has slowed to the weakest for more than two years, according to eurozone purchasing managers' indices for January. New orders were particularly weak, pointing to a further deceleration ahead, although manufacturing output growth actually rose.
But addressing the European Parliament in Brussels, Jean-Claude Trichet, ECB president, indicated that no early shift in the central bank's stance was likely. "We have to look at what's happening in the real economy, we have a base line scenario and at this stage I'm not going to modify this base scenario," he said.
Mr Trichet acknowledged - as he has before - that there were downside risks to growth, but added: "Particularly in demanding times of significant market correction and turbulence, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility in already highly volatile markets."
The US Federal Reserve's emergency three-quarters percentage point cut in US interest rates on Tuesday had fuelled speculation that the ECB would be forced to soften its position, especially amid clear signs of a gradual slowdown in eurozone growth.
The eurozone purchasing managers' indices (PMIs), published by NTC Economics and the Royal Bank of Scotland, are closely-watched as indicators of likely future trends. They showed the output growth in services slowing in January to the weakest since August 2003 while output growth in manufacturing rose from December. Overall, the composite PMI fell to a 31-month low of 52.7 in January, from 53.3 in the previous month.
New orders growth in services remained positive but was the weakest for more than four years. New order growth in manufacturing slipped to a three-month low.
Jacques Cailloux, economist at Royal Bank of Scotland, said that the "broad stagnation" in new business and in backlogs of work reported by those surveyed "suggest that there is very little forward-looking momentum in the economy at this stage, with increasing risks that the economy could be at a standstill by the middle of the year."
The slowdown would force the ECB to cut its main interest rate in the second quarter of this year but "a further loss of confidence in the financial market could prompt an earlier cut," Mr Cailloux added.
The euro eased 0.2 per cent on Wednesday to $1.4595 against the dollar and dropped 0.6 per cent to Y154.83 against the yen.
The ECB has left its main interest rate unchanged at 4 per cent since last June. It had envisaged raising rates again in September and remains seriously concerned by an inflation rate which, at 3.1 per cent, remains clearly higher than its target of an annual rate "below but close" to 2 per cent. Earlier this month, Mr Trichet had warned that a "pre-emptive" rate rise was possible to head-off the inflationary dangers posed by excessive wage demands.