Thursday, December 6, 2012

ECB holds rate steady, cuts growth forecasts further

    The European Central Bank (ECB) held its benchmark refinancing rate steady at 0.75 percent, as widely expected, and said it would continue to provide commercial banks with a full allotment of funds for as long as necessary and at least until July 2013 as this year's weak economic activity is expected to extend into next year.
    The ECB, which cut its refinancing rate in July, also again revised downwards its economic forecasts for the 17 nations that share the euro currency and first expects a gradual recovery later in 2013.
    For 2012 the ECB expects the area's Gross Domestic Product to shrink between 0.4 and 0.6 percent, down from 2011's expansion of 1.4 percent and slightly below its previous forecast for a contraction of 0.4 percent.  In 2013 the economy could shrink by 0.9 percent or expand by 0.3 percent, a downwards revision from September when it forecast growth of 0.5 percent.
    In 2014 the euro zone's GDP is forecast to expand between 0.2 and 2.2 percent.
    "The Governing Council continues to see downside risks to the economic outlook for the euro area," ECB President Mario Draghi said in a statement, adding these risks were related to the resolution of the debt and governance issues, fiscal decisions in the U.S. and geopolitical issues that could dampen sentiment longer than assumed and further delay investment, employment and consumption.
    Inflation in the euro zone, which fell to 2.2 percent in November from 2.5 percent in October, remains above the ECB's target of below but close to 2.0 percent, and Draghi said he expects the rate to fall below 2.0 percent next year. Expectations are firmly anchored and in line with the ECB target.
    The euro zone's economy has been hard hit by the sovereign debt crises in Southern Europe, and in the third quarter the GDP contracted by 0.1 percent from the second quarter, for an annual contraction of 0.6 percent, deeper than the 0.4 percent contraction in the second quarter.
    "Later in 2013 economic activity should gradually recover, as global demand strengthens and our accommodative monetary policy stance and significantly improved financial confidence work their way through to the economy," Draghi said, adding it was essential for governments to further reduce fiscal and structural imbalances and continue to restructure the financial sector to sustain confidence.


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