ECB tweaks growth, inflation forecasts a shade higher

Business Friday 03/June/2016 14:56 PM
By: Times News Service
ECB tweaks growth, inflation forecasts a shade higher

Vienna: The European Central Bank (ECB) on Thursday nudged up its expectations for growth and inflation in the euro area this year, but kept its main interest rate unchanged in negative territory and said it would press on with its unprecedented stimulus effort.
Speaking after a meeting of the Bank's governing council in Vienna, ECB President Mario Draghi said he expected rates to stay at present or lower levels well beyond the duration of asset purchases, which are due to last till at least March 2017.
"Economic recovery in the euro area continues to be dampened by subdued growth prospects in emerging markets, the necessary balance sheet adjustments ... and a sluggish pace of implementation of structural reforms," he told reporters.
"Additional stimulus ... is expected from the monetary policy measures still to be implemented and will contribute to further rebalancing the risk to the outlook for growth."
Inflation has missed the ECB's target of nearly two per cent for years as high unemployment keeps a lid on wages, high debt levels choke investment, demand for goods and services remains weak and sharply lower oil prices drag down prices.
But with first quarter growth beating all expectations, economic sentiment rising, investments recording a surprising surge and household consumption holding up, the euro zone economy is on its best run since the global financial crisis.
Yet his carefully nuanced statement underlined how fragile that recovery remains and how vulnerable it is to risks which Draghi listed as including a slowdown in the global economy and possible fall-out from Britain's June 23 EU referendum.
The Bank upgraded its 2016 euro zone growth forecast to 1.6 per cent this year from the 1.4 per cent it predicted in March, maintaining its forecast of 1.7 per cent next year and trimming it for 2018 to 1.7 per cent from an earlier 1.8 per cent forecast.
It also raised its 2016 inflation forecast to 0.2 per cent from 0.1 per cent, citing factors including the base effect of a recent rise in oil prices.
ECB opposes Brexit
Asked at the news conference for the Bank's stance on a possible exit of Britain from the EU, or Brexit, Draghi said the ECB was ready for such an eventuality but believed it was economically preferable for Britain to remain in the bloc.
Earlier, the ECB kept its rate on bank overnight deposits, now seen as its primary interest rate tool, at -0.40 per cent.
The main refinancing rate, which determines the cost of credit in the economy, was unchanged at 0.00 per cent while the rate on the marginal lending facility — or emergency overnight borrowing rate for banks — remains at 0.25 per cent.
The decision to leave rates on hold was unanimously expected by the 65 analysts polled by Reuters after the ECB cut its deposit rate deeper into negative territory in March, decided to buy corporate bonds and unveiled a new ultra-cheap corporate loan scheme.
Buying assets to the tune of 1.74 trillion euros ($1.94 trillion) and keeping rates negative, the ECB is trying to boost inflation, which has been stuck in negative territory for months, raising the risk that the 19-member currency bloc sinks into a deflation spiral.
In its next move, the ECB starts buying corporate debt on June 8, probably starting small before ramping up as more issuers come to the market. Then it will offer longer-term refinancing operations (TLTRO) towards the end of the month, giving banks access funding at zero or negative rates.
Draghi said the bank had postponed a decision on whether to grant euro zone-member Greece, currently in the throes of protracted negotiations with lenders over economic reforms, access to cheap money.
He said it would be discussed after lenders had determined whether Athens had adopted the agreed reforms.