Central Bank cuts growth forecast
Earlier optimism curtailed as interest stays at record low.
FRANKFURT, GeRmANy — Acknowledging the economy is likely to remain weak into next year, the European Central Bank sharply reduced its growth forecast for the eurozone Thursday as it left its main interest rate at a record low.
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.
“Available statistics and survey indicators continue to signal further weakness in activity in the last quarter of the year,” Draghi said, adding that “weak activity is expected to extend into next year.”
Among the risks that could hamper future growth, 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 sure to displease Germany, which wants to retain control over the small banks that do most of the lending in that country.
National regulators have been criticized for failing to force their banks to confront their problems, delaying resolution of the eurozone crisis.
“One should aim at having this mechanism covering all euro area banks,” Draghi said, warning that failing to do so could lead to the stigmatizing of certain banks. “You want to avoid frag- mentation in the banking market. You want to keep a level playing field.”
The decision to leave the benchmark interest rate at 0.75 percent was an acknowledgment policymakers need to look for alternative ways of stimulating the persistently moribund economy.
The central bank’s benchmark rate has lost much of its power to influence market rates in troubled corners of the eurozone. Credit remains expensive in countries like Portugal and Italy because of lingering fear among lenders that the eurozone could splinter.
As a result, 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.
So far, the mere threat of ECB 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.
Inflation in the euro- zone has fallen close to the ECB’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,” said economist Marie Diron, who advises consulting firm Ernst & Young.
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 ECB governing council may well have been concerned a cut would use up one of the last policy weapons they have left.
“The ECB is out of ammo,” said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y. “We cannot imagine what it might do at its meeting tomorrow that would make any difference.”