The European Central Bank's Governing Council on Thursday decided to leave interest rates unchanged, as expected by the markets, amid continued uncertainty about the strength and durability of the eurozone's nascent economic recovery. The benchmark rate remains at 3.25 per cent, where it has been since last November.

Recent surveys of economic activity have provided a mixture of good and bad news. April's Reuters-NTC survey of manufacturing purchasing managers, published earlier on Thursday, pointed to the first expansion in activity across the eurozone as a whole for more than year. But although manufacturing showed growth in several eurozone member states including France, Italy and Spain, activity continued to decline in Germany and Austria. The previous week, the Ifo institute's survey of west German business - the most closely watched of all national eurozone surveys - unexpectedly showed deteriorating sentiment among retailers and wholesalers.

Members of the ECB's Governing Council have repeatedly expressed their concern about the fragility of the global recovery. They fear that the recent upturn in activity in the US - the world's largest economy - could be temporary. They also worry that political instability in the Middle East could push up oil prices yet further, depressing consumers' real purchasing power and ramping up businesses' costs.

But the rise in oil prices creates a dilemma for the ECB, since it remains firmly wedded to its inflation target. Eurozone consumer price inflation is still above the ECB's target ceiling of 2 per cent, though according to provisional official estimates it fell to 2.2 per cent from 2.5 per cent in April.

The ECB is unlikely to raise interest rates before firmer signs of economic recovery appear, since inflationary pressures within the eurozone economy as a whole are likely to remain muted - even after allowing for higher oil prices - as long as economic growth remains weak. But it is still expected to raise the cost of borrowing later in the year, as the recovery gathers pace.

After the Governing Council’s announcement Wim Duisenberg, president of the ECB, told a press conference: "While the recovery in 2002 is expected to initially proceed at a gradual pace, real GDP growth rates in the euro area should again be in line with poteintial growth later this year."

Mr Duisenberg also told the conference the Governing Council had "concluded that the prospects for price stabiity appear to be somewhat less favourable than they were towards the end of last year".

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