News Column

ECB Slashes Growth Forecast, Opens Door to Rate Cut

Dec. 6, 2012
european central bank

The European Central Bank Thursday opened the door to a rate cut next year, after slashing its economic growth projections for the 17-member eurozone.

Speaking at his monthly press conference, ECB President Mario Draghi said the eurozone economy will shrink by 0.3 per cent in 2013, reversing a September projection of 0.5-per-cent growth.

"The economic outlook is weak," Draghi told reporters with concerns having grown recently that the eurozone could lurch deeper into recession in the coming months.

The region's economy is set to slump by 0.5 per cent this year, Draghi said. It should expand by 1.2 per cent in 2014, the December projections show.

But the risks to the outlook remain on the downside, he said.

The ECB chief also said that inflation should fall next year below the ECB's annual target of 2 per cent amid slowing economic growth after coming in at 2.5 per cent in 2012.

Unemployment in the eurozone surged to a record 11.7 per cent in October as governments rolled out a tough round of fiscal austerity aimed cutting back high deficit-and-debt levels.

"It is a very high price but it is unavoidable," Draghi said, laying the blame on governments for failing to act earlier to clean up their state finances.

Draghi's downbeat economic outlook resulted in the euro slumping 0.7 per cent to below the key 1.30-dollar mark.

Still, he said the Frankfurt-based bank expects economic activity to gradually recover later next year following a pickup in global demand and the bank's accommodative monetary policy.

However, he conceded that the economic indicators had been mixed and that the bank was continuing to monitor economic developments.

The release of the ECB's new economic projections came after the bank announced that it held borrowing costs at an historic low of 0.75 per cent.

Interest rates in the 17-member eurozone have been on hold since July.

But Draghi declined to say whether the bank has done enough to bolster economic growth.

"There was a wide discussion but in the end there was a prevailing consensus to leave interest rates unchanged", Draghi said when asked if the bank's governing council had discussed a rate cut.

The ECB's decision Thursday to leave borrowing costs unchanged was in line with analysts' forecasts.

It followed the announcement in London by the Bank of England (BoE) that it also left monetary policy unchanged.

The BoE said interest rates in Britain would remain at 0.5 per cent, while the size of its Asset Purchase Facility (QE) would be maintained at 375 billion pounds (604 billion dollars).

In his comments to reporters Thursday, Draghi also said that he believed the eurozone's proposed new bank supervisor should be monitor all of the currency bloc's 6,000 lenders.

German opposition to the bank authority having responsibility for all the region's banks has lead to tensions among eurozone members as they attempt to agree on the supervisor's powers.

But Draghi said: "In practice, a supervisor will not be able to monitor all banks."

Source: Copyright 2012 dpa Deutsche Presse-Agentur GmbH

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