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European Central Bank Cuts Growth Forecast European Central Bank Cuts Growth Forecast
(about 1 hour later)
FRANKFURT — Acknowledging that the economy is likely to remain weak into next year, the European Central Bank sharply reduced its growth forecast for the euro zone Thursday as it left its main interest rate unchanged at a record low. FRANKFURT — Acknowledging that the economy is likely to remain weak well into next year, the European Central Bank sharply reduced its growth forecast for the euro zone Thursday, and left its main interest rate unchanged at a record low of 0.75 percent.
In something of a reversal from earlier optimism that the economy would start to recover next year, the bank’s president, Mario Draghi, announced that the prediction was now for somewhere between growth of 0.3 percent of gross domestic product and a contraction of 0.9 percent. That compares with a previous forecast of 0.5 percent growth. Meanwhile the central bank in Britain, which does not use the euro, also decided to hold its benchmark interest rate at a record low, amid indicators that the outlook for the British economy was dimming, largely because of troubles in the euro zone. The Bank of England kept the rate at 0.5 percent.
“Available statistics and survey indicators continue to signal further weakness in activity in the last quarter of the year,” Mr. Draghi, said, adding that “weak activity is expected to extend into next year.” Mario Draghi, the E.C.B. president, cited economic uncertainty for the 17 euro zone countries in scaling back the bank’s prediction outlook for 2013. Compared with a previous growth forecast of 0.5 percent of growth in gross domestic product for the currency bloc, he said growth at best was unlikely to exceed 0.3 percent. And the euro zone economy could even end up shrinking 0.9 percent next year, he said.
Among the risks that could hamper future growth, Mr. Draghi listed “uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States.”Among the risks that could hamper future growth, Mr. Draghi listed “uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States.”
He expressed confidence that European leaders would reach agreement soon on a unified regulatory framework for banks, but he insisted that such a system cover all 6,000 banks in the region — a position that is sure to displease Germany, which wants to retain control over the small banks that do most of the lending in that country. Yet he left room for the prospect of a return to more positive figures later next year, citing recent indicators showing increased business confidence in France, Germany and Italy.
National regulators have been criticized for failing to force their banks to confront their problems, delaying a resolution of the euro zone crisis. In London on Thursday, the Bank of England not only held interest rates steady, but signaled no change in its economic stimulus program, which has called for purchasing £375 billion, or some $600 billion, in government bonds to pump more money into the economy.
“One should aim at having this mechanism covering all euro area banks,” Mr. Draghi said, warning that failing to do so could lead to the stigmatizing certain banks. “You want to avoid fragmentation in the banking market. You want to keep a level playing field.” The government had said Wednesday that it would take a year longer to bring Britain’s budget deficit under control because the economic recovery had slowed, mainly because of troubles in the euro zone.
The decision to leave the benchmark interest rate at 0.75 percent was an acknowledgment that policy makers need to look for alternative ways of stimulating the persistently moribund economy. The Bank of England is evaluating its options to fuel the British economy, which is again running out of steam after emerging from a double-dip recession earlier this year.
The central bank’s benchmark rate has lost much of its power to influence market rates in troubled corners of the euro zone. Credit remains expensive in countries like Portugal and Italy because of lingering fear among lenders that the euro zone could splinter. Apart from its bond-buying stimulus program, known as quantitative easing, the central bank has also been helping banks access capital more cheaply to be able to lend more. Some economists said more stimulus might be needed to bring back more stable growth and allow the government to meet its debt reduction target.
As a result, Mr. Draghi has searched for other means to stimulate lending, in particular by pledging to buy bonds of troubled countries like Spain to help contain their borrowing costs and remove fear of euro breakup. “Given that economic data has weakened if anything over the last month or so, further quantitative easing remains in the cards,” said Victoria Clarke, an economist at Investec in London.
So far, the mere threat of E.C.B. bond buying has been enough to push down rates on government bonds. But many economists wonder how long the tenuous calm on debt markets can last. The British economy is likely to shrink 0.1 percent this year before expanding 1.2 percent next year, according to the Office for Budget Responsibility, an independent agency. That compares with 0.8 percent growth predicted for this year in March and a 2 percent expansion for next year.
Some economists expect the Bank of England to restart its bond purchasing program early next year as a way to inject more money into the economy.
For the E.C.B., in a year where it has cut its rates to a record low, introduced a €1 trillion, or a $1.3 trillion, program of lending to banks and announced its willingness to purchase bonds from heavily indebted countries within the euro zone, the decision to leave the benchmark interest rate untouched seemed to reflect an eagerness to shift some of the burden of responsibility back to governments.
Mr. Draghi called it “essential” that countries continue restructuring their financial sectors and reduce their amount of public debt, but refrained from indicating that any further programs were in the offing to help ease the crisis, now entering its third year.
The E.C.B.’s benchmark rate has lost much of its power to influence market rates in troubled corners of the euro zone. Credit remains expensive in countries like Portugal and Italy because of lingering fear among lenders that the euro zone could splinter.
“There were no clear hints on unconventional measures of credit easing,” wrote Elga Bartsch, a researcher with Morgan Stanley, in a note to investors. “In fact, when asked about additional measures the E.C.B. could take, Mr. Draghi rattled through what the E.C.B. has done in the past and the positive impact that these measures have had.”
Among those successful programs was a decision to make cheap, three-year loans available to European banks, largely credited with helping to avert a banking crisis and lowering borrowing costs for countries like Italy and Spain. The bank announced six more dates when banks would be able to borrow money in the first half of 2013.
Another mechanism that has helped stimulate lending has been the pledge to buy bonds of troubled countries to help contain their borrowing costs and remove fear of a euro breakup.
So far, the mere threat of E.C.B. bond buying has been enough to push down the borrowing of vulnerable countries like Spain and Italy. But many economists wonder how long the tenuous calm on debt markets can last, and speculation has mounted that Spain will be the first country to take advantage of the offer.
But Mariano Rajoy, prime minister of Spain, has said he wants assurances that his country’s debt yields would be brought down if it were to participate. Mr. Draghi rejected any preconditions for entry into the bond-buying program, dubbed Outright Monetary Transactions, citing the stipulations for participation announced in September.
“The conditions under which the O.M.T. is going to be activated are very straight,” Mr. Draghi said. “They don’t talk about negotiations or a certain interest rate or anything like that.”
Mr. Draghi also expressed confidence that European leaders would reach agreement soon on a unified regulatory framework for banks, but he insisted that such a system cover all 6,000 banks in the region — a position that is sure to displease Germany, which wants to retain control over the small banks that do most of the lending in that country.
Inflation in the euro zone has fallen close to the E.C.B.’s official target of 2 percent, leaving room for a rate cut. Still, a cut would have been a surprise. The central bank “has explained before that it thinks such a cut would have no impact on the economy as the transmission mechanism remains impaired,” Marie Diron, an economist who advises the consulting firm Ernst & Young, wrote in an e-mail.Inflation in the euro zone has fallen close to the E.C.B.’s official target of 2 percent, leaving room for a rate cut. Still, a cut would have been a surprise. The central bank “has explained before that it thinks such a cut would have no impact on the economy as the transmission mechanism remains impaired,” Marie Diron, an economist who advises the consulting firm Ernst & Young, wrote in an e-mail.
Mr. Draghi gave no clear indication whether a rate cut had been discussed among the central bankers, saying only that “there was a wide discussion, but in the end, the prevailing decision was to leave the rates unchanged.”Mr. Draghi gave no clear indication whether a rate cut had been discussed among the central bankers, saying only that “there was a wide discussion, but in the end, the prevailing decision was to leave the rates unchanged.”
Some members of the E.C.B. governing council may well have been concerned that a rate cut would use up one of the last policy weapons they have left. Some members of the E.C.B. Governing Council may well have been concerned that a rate cut would use up one of the last policy weapons they have left.
“The E.C.B. is out of ammo,” Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, wrote Wednesday in his daily memo to clients. “We cannot imagine what it might do at its meeting tomorrow that would make any difference.”“The E.C.B. is out of ammo,” Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, wrote Wednesday in his daily memo to clients. “We cannot imagine what it might do at its meeting tomorrow that would make any difference.”
Julia Werdigier reported from London and Jack Ewing contributed reporting from Warsaw.