European Central Bank slashes growth forecast for eurozone

Amid global turmoil, European Central Bank President Mario Draghi announces cuts in inflation and growth forecasts, says ready to expand quantitative easing programme if necessary

Photo by: Reuters
Photo by: Reuters

European Central Bank President Mario Draghi addresses an ECB news conference in Frankfurt, Germany, January 22, 2015

Updated Sep 4, 2015

The European Central Bank cut its inflation and growth forecasts for the eurozone on Thursday and its president said things could get worse.

The bank pledged to beef up or prolong its bond-buying program if the picture indeed darkened further, although no one on bank's Governing Council had argued for it now.

The ECB, which left interest rates unchanged in a widely predicted decision, said the chances of missing its medium-term inflation target had increased due to lower oil prices, weaker growth in China and other emerging markets and an appreciating euro.

Mario Draghi, the ECB president, said the bank's 1 trillion euro-plus asset-buying program was working smoothly, if slowly, and the policy-making Governing Council was ready and willing to take further policy action but decided it would premature to do so now.

"In particular [the Council] recalls that the asset purchase program provides sufficient flexibility in terms of adjusting the size, composition and duration of the program," he told a news conference.

In one small change to the quantitative easing program, the bank agreed to increase the share of any sovereign bond issue it could buy to 33 percent from 25 percent, provided that did not give it a blocking minority among bondholders.

The ECB forecast that inflation would be a mere 0.1 percent this year, 1.1 percent in 2016 and 1.7 percent in 2017, compared with its June projections of 0.3, 1.5 and 1.8 percent respectively.

It lowered its forecast for growth in the 19-nation euro area to 1.4 percent in 2015, 1.7 percent next year and 1.8 percent in 2017, from June projections of 1.5, 1.9 and 2.0 percent respectively.

The forecasts, meanwhile, were compiled based on data taken before August 12 and did not take into account the latest sharp economic deterioration in China, which posed "downside risks to the projections themselves," Draghi said.

However, he said the council tended to think the weaker inflation outlook was due to "transitory effects" but would closely monitor all relevant factors.

Draghi confirmed the ECB had cut Emergency Liquidity Assistance (ELA) to Greek banks for the second time in two weeks.

The ECB launched its 60 billion euro ($68 billion) per month quantitative easing program in March to boost consumer prices after a short bout of deflation. It is due to run until September 2016 but Draghi clearly hinted it could be extended.