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ECB forecasts eurozone GDP shrinkage of 4.6 percent


Latest update : 2009-06-04

The European Central Bank (ECB) warned on Thursday that the Eurozone economy would contract 4.6 percent this year, much more than previously feared. Its interest rates is being kept at a record low of 1.0 percent.

AFP - The European Central Bank warned Thursday the eurozone economy would contract 4.6 percent this year, a far deeper slide than previously feared, as it joined the Bank of England in keeping its key interest rate at record low levels.
The ECB and the Bank of England held their main rates at 1.0 percent and 0.50 percent respectively after policymakers met in Frankfurt and London, with ECB head Jean-Claude Trichet hinting that the eurozone rate could fall further.
Central banks in Denmark, Iceland and Russia cut their key interest rates on Thursday.
A new forecast by ECB staff meanwhile estimated that economic activity in the 16-nation eurozone would contract by 4.6 percent this year, a sharp downgrade from a March forecast of a 2.7 percent drop.
A sharp decline in global demand and trade meant that "economic activity weakened considerably in the first quarter of 2009," an ECB statment said.
The eurozone economy contracted by a record 2.5 percent from output in the last three months of 2008 and by 4.8 percent from the first quarter of last year, official data showed on Wednesday.
For 2010, the ECB staff estimated eurozone activity would shrink by another 0.3 percent, compared with an earlier outlook for a stagnating economy.
Trichet told a press conference the bank's plan to purchase 60 billion euros' (85 billion dollars') worth of low-risk covered bonds would begin next month and run until July 2010 "at the latest."
The move is designed to boost a key credit market for businesses that has remained clogged amid the global financial crisis and the eurozone's unprecedented recession.
Trichet again rejected the controversial term quantitative easing to describe the bank's monetary policy.
"We are not embarking on quantitative easing," he stressed after German Chancellor Angela Merkel issued rare criticism of the US Federal Reserve and Bank of England for agreeing to buy government debt, a prime example of what is also called QE.
Trichet said he had spoken with Merkel, who also charged the ECB had "bowed to international pressure with its purchase of covered bonds."
The ECB chief said Merkel "confirmed" she was "fully backing what we were doing."
Trichet in addition underscored the ECB's "fierce independence, saying: "All what we do is done without bowing to any influence or pressure."
But he sidestepped questions on how the bank would pay for the bond purchases and whether it would "sterilize," or offset the operation through the sales of other assets or by issuing debt of its own, for example.
In addition to the new growth forecasts, ECB staff now expects inflation to reach 0.3 percent this year and 1.0 percent in 2010, with the 2009 figure just slightly below the previous estimate of 0.4 percent.
The ECB's medium-term inflation target is just below 2.0 percent.
With little news coming from the decision and press conference, "the ECB's June policy meeting seemed to be very much a holding operation," IHS Global Insight chief European economist Howard Archer commented.
Asked if the bank might increase its purchases of low-risk bonds or consider buying other kinds of corporate or public debt, Trichet said: "We have decided to embark on a 60-billion-euro purchase of covered bonds. Full stop."
He also said: "We consider the present level of interest rates to be appropriate," suggesting they would not be cut further in the immediate future.
But Trichet did not completely rule out lower interest rates, saying: "We did not decide today that the new level of our policy rates were (at) the lowest level" possible.
Sylvain Broyer at Natixis thought that meant the bank might be inclined to lower rates again, while Joerg Kraemer at Commerzbank suggested the eurozone had seen its final rate cut.

Date created : 2009-06-04