Thursday, March 6, 2014

ECB revises forecast for inflation down, growth higher

    The European Central Bank (ECB), which earlier today held its policy rates steady, repeated its guidance that rates are expected to "remain at present or lower levels for an extended period of time" as it trimmed its inflation forecast and raised its growth forecasts for the coming years.
    Mario Draghi, ECB president, told a press conference the moderate economic recovery was proceeding in line with expectations of "a prolonged period of low inflation, to be followed by a gradual upward movement in HICP inflation rates toward levels close to 2 percent."
    The ECB, which cut it benchmark refinancing rate by 50 basis points in 2013 to a record low of 0.25 percent, trimmed its forecast for inflation to 1.0 percent in 2014, down from its previous forecast of 1.1 percent, but maintained the 2015 forecast at 1.3 percent.
    For 2016 the ECB expects average inflation of 1.5 percent, rising to 1.7 percent in the fourth quarter of 2016, still below the ECB's target of inflation below but close to 2.0 percent. Draghi stressed that  projections three year in advance were based on several assumptions, including unchanged exchange rates and lower oil prices.
    In February, inflation in the 18-nation euro area was unchanged from January and December at 0.8 percent, and Draghi expects inflation to remain at current levels in coming months
    The euro area's economy is slowly improving and Draghi said confidence indicators up to February show continued "moderate growth in the first quarter of 2014" as domestic demand is expected to improve while exports benefit from global demand.
    However, unemployment remains high - the January unemployment rate was steady at 12 percent - and continued paydown of debt by the public and private sector will continue to weigh on the pace of economic recovery.
    "The risks surrounding the economic outlook for the euro area continue to be on the downside," Draghi said, adding developments in global financial markets and emerging market economies, along with geopolitical risks, have the potential to negatively affect the economy.
     Gross Domestic Product in the euro area expanded by 0.3 percent in the fourth quarter of 2013, the third consecutive quarter of growth after six quarters of contraction, for annual growth of 0.5 percent, the first quarter in eight quarters with a positive annual growth rate.
    The ECB staff revised upwards its forecast for 2014 GDP growth to 1.2 percent, up from 1.1 percent previously forecast, and 1.5 percent growth in 2015, up from 1.3 percent. For 2016 the ECB forecast growth of 1.8 percent.
     "The information and analysis now available fully confirm out decision to maintain an accommodative monetary policy stance for as long as necessary," Draghi said, adding the ECB governing council was "firmly" reiterating its forward guidance based on the subdued outlook for inflation given the broad-based weakness of the economy, a high degree of underutilized capacity and subdued money and credit creation.
    Draghi also repeated the last month's statement that the ECB was closely monitoring the money markets and ready to consider all instruments to maintain the "high degree of monetary accommodation and to take further decisive action if required."


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