ECB sharply cuts inflation and growth forecasts as economic climate darkens

The European Central Bank slashed its forecasts for growth and inflation over the next two years, saying the outlook had deteriorated since its last staff forecasts were published in September.

The bank also kept the cost of borrowing at record lows after it met today, facing renewed pressure to prevent the bloc going into reverse including a public call from Washington to act.

With recovery stalled across many of the 18 countries that share the euro, it forecast 2014 inflation at 0.5 per cent, rising slightly to 0.7 per cent next year and 1.3 per cent in 2016. Staff cut their prediction for economic output in the euro zone to 0.8 per cent this year, 1.0 per cent in 2015 and 1.5 per cent in 2016.

In September, ECB staff had predicted that inflation would be 0.6 per cent this year, then rise to 1.1 per cent and 1.4 per cent in 2015 and 2016 respectively. It had also forecast in September that gross domestic product would grow by 0.9 percent this year and by 1.6 per cent and 1.9 per cent in 2015 and 2016 respectively.

By lowering its forecasts, which show how the ECB expects the economy to develop, the euro zone central bank will heighten expectations that it will take further steps to bolster the bloc’s flagging economy.

ECB president Mario Draghi recently threw the door open for drastic measures to prevent growth and inflation from sliding further and expectations are rising that a move could come as soon as the first three months of next year

Mounting concerns about the euro zone economy were underlined by the US Federal Reserve’s influential vice chair, Stanley Fischer, who said that money-printing would help Europe as it had the United States.

“If the ECB moves in that direction, it will have positive effects,” Mr Fischer, who was Mr Draghi’s academic mentor at university, told a newspaper in Italy.

Mr Draghi faces considerable political obstacles to taking this step, chiefly from a reluctant Germany.

Last week, Sabine Lautenschlaeger, Germany’s appointee to the ECB’s executive board, said now was not the time for state bond buying. So while the ECB could extend a scheme to buy secured debt to include corporate bonds, it is unlikely it will announce any money printing to buy government bonds.

Economists, roughly half of whom expect the bank to start buying government bonds - a step that should buoy the economy when banks exchange bonds for ECB cash - have pencilled this in for the first three months of next year. ECB vice-president Vitor Constancio has said the bank will be better able to gauge then whether it needs to take the ultimate policy step.

At Thursday’s meeting, the ECB left its main refinancing rate, which determines the cost of credit in the economy, at 0.05 per cent. It also kept the rate on bank overnight deposits at -0.20 per cent, which means banks pay to park funds at the central bank.

Other major central banks including the Fed, Bank of Japan and Bank of England, have already used quantitative easing to stimulate their economies. But divisions between debt-shy euro zone countries such as Germany and southern states including Greece make such a step more difficult for the ECB. Germany, the bloc’s biggest economy by far and its most influential, fears it would encourage reckless borrowing.

“The euro zone needs growth and jobs to ensure that it survives,” said Lena Komileva of consultancy G+ Economics, warning of the obstacles to so-called quantitative easing. “Germany’s strong opposition ... raises questions about its ability to act fast enough.”

Draghi will address the media for the first time in the ECB’s new 1.3 billion euro headquarters in an imposing Frankfurt skyscraper, designed to show the strength of the currency.

Euro zone inflation, a key yardstick of the economy’s health and viewed by investors as a trigger for the ECB to buy government bonds, slowed to just 0.3 per net last month. If prices were to start to falling, as they already have in some countries, that could discourage consumers from shopping while they wait for goods to get cheaper, creating a vicious circle that pulls down the economy.

A conflict in Ukraine, which has frozen much of EU-Russian commerce, a slowdown in momentum in China and war in Syria add to the gloom, as does the tumbling price of oil.

The ECB has already cut borrowing costs to record lows, given cheap loans to banks and started buying repackaged loans to kick-start lending.

Source: The Irish Times 

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