Cen­tral Bank cuts growth forecast

Ear­lier op­ti­mism cur­tailed as in­ter­est stays at record low.

Austin American-Statesman - - BUSINESS - By Melissa Eddy andjack Ewing The New york Times ECB pres­i­dent Mario Draghi said weak­ness will per­sist into next year, leav­ing the door ajar for fur­ther in­ter­est-rate cuts. ralph OR­LOWSKI / bloomberg

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.”

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