The European Central Bank (ECB), which earlier today left its policy rates unchanged, said economic activity should slowly recover next year and 2015 but expects inflation to remain low for a prolonged period and lowered its forecast.
In its latest forecast, ECB staff cut its forecast for inflation this year to an average of 1.4 percent, down from its September forecast of 1.5 percent, and its 2014 forecast to 1.1 percent from 1.3 percent. In 2015 inflation is forecast to rise to 1.3 percent, still below the ECB's aim for inflation that is close to, but below 2 percent.
ECB President Mario Draghi said the new forecast confirms the ECB council's decision last month to cut its rate for the second time this year to 0.25 percent. It has cut rates by 50 points this year.
Reflecting the recent improvement in economic data and confidence indicators up to November that are consistent with growth in the fourth quarter, ECB staff revised upwards their growth forecast.
While the forecast for 2013 was unchanged for economic contraction of 0.4 percent, slightly less than 2012's decline of 0.6 percent, the forecast for 2014 was revised up to 1.1 percent from 1.0 percent and for 2015 growth is forecast at 1.5 percent.
"To sum up, the economic analysis indicates that we may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to 2% later on," Draghi told a press conference.
In November the euro area inflation rate rose slightly to 0.9 percent from October's surprisingly-low 0.7 percent that convinced ECB policymakers of the need to cut rates last month.
In the third quarter the euro area's Gross Domestic Product grew by a meagre 0.1 percent from the second quarter for an annual drop of 0.4 percent, the seventh quarter in a row with a shrinking economy on an annual basis.
"Looking ahead to 2014 and 2015, output is expected to recover at a slow pace, in particular owing to some improvement in domestic demand supported by the accommodative monetary policy stance," Draghi said.
In addition to the rate cut last month, the ECB said banks would be provided with as much money as they need at a fixed rate at least until July 2015.
Draghi also confirmed that the ECB would keep its accommodative policy stance "for as long as necessary" and that key ECB interest rates "would remain at present or lower levels for an extended period of time."
This is the same guidance the ECB has given since July when it broke with tradition and introduced the so-called "forward guidance" to help guide future rate expectations.
"We are monitoring developments closely and are ready to consider all available instruments," Draghi said, giving the impression that the choice of instruments would depend on actual circumstances.
Despite signs of a stronger economy, Draghi said risks remain on the downside, with financial market developments having the potential to negatively affect economic conditions, along with the risk of higher commodity prices, weaker-than-expected domestic demand and export growth and slow or insufficient structural reforms.