© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
Last updated: December 6, 2012 3:59 pm
The European Central Bank slashed its eurozone economic outlook for next year, forecasting further contraction at a time of record unemployment, but decided to keep interest rates on hold as it saw no big threat from inflation.
Mario Draghi, ECB president, said a “gradual recovery should start later in 2013”. Speaking after a meeting of the interest rate-setting governing council, he said the “prevailing consensus” on the council was to keep the main refinancing rate on hold at 0.75 per cent.
The bank’s quarterly forecasts are expressed in ranges and its latest revision represented a sharp correction from September’s projection. The midpoint of the new ranges shows eurozone GDP contracting 0.3 per cent in 2013, against a previous forecast that predicted growth of 0.5 per cent.
The gloomy ECB forecasts followed Wednesday’s cut of the UK’s growth prospects. Taken together with the apparent lack of unanimity among the 22 current governing council members on the wisdom of holding rates steady, an early cut next year was seen as becoming more likely.
“I think the combination of substantial downward revisions of both growth and inflation projections as well as the evidence that there are voices calling for a cut seems to indicate that an ECB cut is coming before long,” said Valentin Marinov, a currency strategist at Citigroup in London.
The euro fell against other leading currencies as investors moved to price-in lower than expected interest rates in the eurozone. The single currency hit its weakest level against the pound and the US dollar in more than a week to trade below $1.30.
European equities, however, continued to rally. Germany’s Dax index hit a five-year high, with investors believing ECB actions had significantly reduced the risk of a eurozone break-up.
Asked why the ECB had not cut rates given its analysis of the eurozone’s growth prospects, Mr Draghi said the outlook for inflation was broadly unchanged, monetary policy was already “very accommodative” and financial markets had stabilised. The bank’s principal mandate is to target inflation of close to, but less than, 2 per cent over the medium term. The ECB cut inflation predictions to 1.6 per cent next year and 1.4 per cent for 2014.
Mr Draghi said recent improvements in business confidence indicators, albeit from a low level, meant there were “conflicting signs” about short-term prospects.
Economic weakness, he said, would extend into next year with balance sheet adjustments and economic uncertainty weighing on consumption and investment. The expected recovery late in 2013 would lead to growth of 1.2 per cent in 2014.
Some analysts suggested the ECB assessment was too gloomy. “In our view, the ECB had been far behind the curve until August 2012,” Holger Schmieding at Berenberg Bank said. “Having caught up with reality in recent months, the ECB may now have become too pessimistic.”
Mr Draghi argued that the fall in sovereign borrowing costs in some eurozone countries over recent months had done much more to support demand than any cut in the ECB’s main rate could achieve. “We’ve already done much,” he said, but declined to answer whether he felt the bank had done enough.
The ECB has calmed financial markets in recent months by promising to step in and buy the debt of eurozone countries with distressed bond markets if it believes the market is speculating on a eurozone break-up and if the country concerned commits to a degree of fiscal oversight.
The programme, Outright Monetary Transactions, has not yet been tested as Spain, the most likely country to need it, has not applied for help. Spain’s cost of borrowing has fallen in recent months, easing pressure on Madrid to apply for help.
Mr Draghi said it was not up to the ECB to tell governments to request help but he again gave short shrift to the idea that the bank would negotiate with Madrid a guarantee to bring Spain’s sovereign borrowing costs down to an agreed level.
He said an agreement on a single supervisory mechanism for eurozone banks – the first phase of a push toward banking union – was a “crucial move” to reintegrating the bloc’s banking system but made clear it should cover all 6,000 eurozone banks.
An agreement was held up this week by German concerns that giving the ECB supervisory powers could conflict with its monetary policy and amid lobbying from its savings banks which fear intrusive ECB supervision.
“In practice it’s quite obvious that the ECB supervisor will not be able to supervise 6,000 banks,” he said. “As the size of the bank and as its systemic significance decreases, so will decrease the intensity of supervision being carried out at central level and it will increase the intensity of the supervision being carried out at national level.”
Mr Draghi also said the ECB was doing some “deep thinking” about how to ensure that supervision was separate from monetary policy.
Earlier, the EU statistics office, Eurostat, confirmed that eurozone gross domestic product had shrunk by 0.1 per cent during the third quarter, while it grew 0.1 per cent in the wider 27-nation EU, compared with the previous quarter.
Additional reporting by Claire Jones in London
Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in