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ECB lowers euro zone outlook as key interest rate held at 0.5%

European Central Bank President Mario Draghi has announced a cut in the bank’s outlook for growth for the euro zone.

Although the ECB stuck to its forecast for a gradual recovery later in the year, the bank nonetheless cut the outlook for growth for 2013 from -0.5% to -0.6%.

Mario Draghi was speaking at a news conference after the ECB left its key interest rate unchanged at a record low 0.5%.

He said recent surveys of economic optimism had shown improvement and the economy “should stabilise and recover in the course of the year.”

The euro zone’s economy shrank by 0.2% in the first quarter of 2013 – the sixth quarter of contraction in a row. Unemployment is at 12.2%, the highest since the euro was introduced in 1999.

Some recent economic data – such as those on lending to companies – were downbeat, while others had improved.

The consensus after a “very rich discussion” on the bank’s 23-member governing council was that there “wasn’t any directional change that would justify taking action at this time,” Draghi said.

The ECB chief added that the bank’s governing council had discussed a wide range of measures that go beyond interest rates to help stimulate the euro zone economy.
These include lowering its deposit rate for deposits from banks to below zero, steps to use financial markets to increase lending for small businesses, and more central bank lending to banks.

But in the end, he said, “we see no reason to act on all these fronts. These are all measures we keep on the shelf.”

The ECB’s key task is to get credit flowing to companies, particularly the small and medium-sized firms that create the most new jobs. Even record low interest rates have not been passed on by banks in the hardest hit parts of the eurozone.

So the ECB is looking at other measures such as encouraging banks to package and sell loans to small businesses, a process that would free up more money to lend. But that will take time to set up.

Draghi held open the door to a rate cut if things worsen, saying that the bank would “monitor” very closely how the economy is doing.

A majority of 81 economists polled by Reuters before today’s rate decision did not expect the ECB to cut its main refinancing rate or its deposit rate this month or in the near future.
The Bank of England also kept UK interest rates steady at 0.5% at its meeting earlier today.


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