FRANKFURT, Aug 7 - The European Central Bank said on Thursday there were increasing grounds to expect euro zone economic recovery to take hold this year and build next year. "There is increasing reason to expect that economic activity will recover gradually in the second half of 2003 and strengthen further in 2004," the ECB said in its August monthly bulletin. The latest economic data confirm that interest rates are appropriate because the outlook for price stability remains favourable, the ECB added. The central bank's policymaking council slashed interest rates by half a percentage point in early June, bringing the benchmark rate to 2.0 percent, an historic low. The euro zone's dominant services sector expanded in July for the first time since December, while the pace of contraction in the region's manufacturing industry eased, Purchasing Managers' Index data released in recent days showed. The ECB said there were signs that confidence was stabilising in the euro zone. Rising real incomes should boost consumption and low interest rates should support investment. Overseas markets also appear to be on a recovery trend which should boost foreign demand for euro area exports. "The gradual economic recovery should be accompanied by moderate wage developments and price-setting behaviour and is not therefore expected to contribute to price pressures." However, there were still downward risks for this main scenario, even though these may have diminished recently, the ECB added. The central bank's policymaking council will closely monitor all factors that could affect its policy assessment, it added. For related news, double click on one of the following codes: