Brighter euro zone data offers scope for ECB rate cut

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An improvement in economic sentiment in the euro zone area adds to evidence that the crisis in the region is easing, analysts said on Tuesday, but the recovery remains weak, offering scope for the European Central Bank to cut interest rates later this week.

In the euro area, economic sentiment rose to 92.5 in July from 91.3 in June, just below a Reuters poll of 92.6, according to data from the European Commission.

In the EU as a whole, the index rose to 95.0, continuing the upward trend observed since May, the EC added, saying sentiment continued to "brighten."

Despite the fact that economic sentiment had reached a 15-month high in July, the data was nothing to get excited about, Jennifer McKeown, senior European economist at Capital Economics, said.

"July's EC survey adds to evidence that the downturn in the region is easing, but it certainly does not point to a strong recovery," she told CNBC in a note on Tuesday.

"For now at least, the economy remains very weak and with money and credit growth still failing to pick up, the ECB should provide more monetary policy support before long," McKeown noted, ahead of the ECB's policy meeting on Thursday.

Howard Archer, chief U.K. and European economist at IHS Global Insight agreed that the data gave the ECB more room to maneuver, though it was unlikely that the ECB would cut rates just yet.

"We think it is very possible that the ECB will eventually take its key policy rate down from 0.50 percent to 0.25 percent as we anticipate that the euro zone will continue to find it very tough to develop clear growth despite the improved July surveys."

He added that overall euro zone sentiment was still at a relatively low level compared to long-term norms, "which suggests that businesses will remain cautious in their employment and investment plans in the near term at least."

"Similarly, it is hard to see consumers generally lifting their spending markedly in the near term as their confidence is still limited...while they are still facing generally high unemployment and limited purchasing power."

McKeown agreed: "This month's improvement was driven by rises in the consumer, service sector and industrial indices. But while the former two are roughly consistent with stagnant activity, the latter points to further falls in industrial output," McKeown remarked.

The Commission said that only in the construction sector confidence weakened and while economic sentiment improved in Italy, Spain, France and Germany, it deteriorated in the Netherlands.

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