ECB sees weaker growth and inflation in eurozone, ready to act

FRANKFURT — The European Central Bank (ECB) yesterday cut its inflation and growth forecasts for the euro zone as president Mario Draghi pledged to beef up or prolong the bank’s stimulus programme if the outlook worsens further.

“The information available indicates a continued, though somewhat weaker, economic recovery and a slower increase in inflation rates compared with earlier expectations,” he said. Stimulus is scheduled to continue “until the end of September 2016, or beyond, if necessary”, he added.

Stock markets in Europe rose after Mr Draghi’s pledge, with the key bourses up between 1.5 per cent and 2.2 per cent late in the session, while the euro fell 1 per cent to a two-week low of US$1.1110 (S$1.57). In New York, the Dow Jones Industrial Average rose 0.7 per cent just after the opening bell.

“Mr Draghi is assuring very clearly that if the turmoil gets any worse, the ECB would do all it takes to keep the recovery on track,” said Mr Holger Schmieding, chief economist at Berenberg Bank in London.

The ECB left interest rates unchanged yesterday in a widely predicted decision, holding its main refinancing rate at a record low of 0.05 per cent. The deposit rate and the marginal lending rate were also left unchanged at minus 0.2 per cent, and 0.3 per cent, respectively. It said the chances of missing its medium-term inflation target had increased due to lower oil prices, weaker growth in China and other emerging markets and an appreciating euro. The ECB forecast that inflation would be a mere 0.1 per cent this year, 1.1 per cent in 2016 and 1.7 per cent in 2017, compared with its June projections of 0.3, 1.5 and 1.8 per cent respectively.

The ECB lowered its forecast for growth in the 19-nation euro area to 1.4 per cent this year, 1.7 per cent next year and 1.8 per cent in 2017, from June projections of 1.5, 1.9 and 2 per cent respectively.

Mr Draghi warned that the forecasts were compiled based on data taken before Aug 12 and did not take into account the latest sharp economic deterioration in China, which posed “downside risks to the projections themselves.”

He said the central bank’s €1 trillion-plus (S$1.6 trillion-plus) asset-buying programme was working smoothly and the Governing Council was ready to take further policy action but decided it was premature to do so now. In one change to the quantitative easing programme, the bank agreed to increase the share of any sovereign bond issue it could buy to 33 per cent from 25 per cent.

Meanwhile, the ECB said it was not ready to buy Greek bonds under the programme. Greece has just agreed to a new bailout from international lenders.

The ECB launched its €60 billion a month quantitative easing programme in March to boost consumer prices after a short bout of deflation. It was due to run until September 2016, but is now expected to be prolonged.

The International Monetary Fund said yesterday that the ECB should consider extending quantitative easing, citing a rise in downside risks to the global economy, including China’s slowdown and volatility. AGENCIES