ECB lowers growth and inflation forecasts

The European Central Bank (ECB) lowered its growth and inflation expectations for 2012 and 2013 today (December 6), while holding its benchmark interest rate at 0.75%.

Expectations have dropped in response to continued uncertainty about the resolution of the sovereign debt crisis, Mario Draghi, the ECB president, explained in a press conference in Frankfurt.

Euro area GDP contracted by 0.1% in Q3, and ECB staff believe annual growth will land between -0.6% and -0.4% in 2012. In 2013, they say it will be between -0.9% and 0.3%, and 0.2% and 2.2% in 2014.

The governor warned economic weakness will extend into next year, as balance sheet adjustments and persistent uncertainty continue to weigh on economic activity. It should gradually recover later in 2013, as "significantly improved" financial market confidence and accommodative monetary policy work their way through to private domestic expenditure.

More positively, Draghi explained both bond and stock markets have registered improvement, while market expectations in Germany, France and Italy all increased in November.

Inflation fell to 2.2% in November, from 2.5% in October. The ECB expects the average rate for 2012 to be 2.5%, while it will drop to between 1.1% and 2.1% in 2013, and 0.6% and 2.2% in 2014.

Regardless, Draghi said there has not been a substantive change to the ECB's medium-term assessment of price stability.

Jennifer McKeown, a senior European economist at Capital Economics, said: "Even the ECB now thinks that the recession will be a long one and, for now at least, it is unwilling or unable to do much to prevent it."

Regarding the single supervisory mechanism, Draghi remained confident an agreement would be reached because of a "generalised will" to do so. He reasserted his desire for the mechanism to cover all banks within the eurozone.

He said it is a crucial move towards reintegrating the banking system, will help to support financial market sentiment, and – in turn – improve the outlook for growth.

At the press conference that routinely follows the ECB's rate announcement, Draghi was questioned by a journalist on the potential for a conflict of interest between his membership of G-30 and his previous employment with Goldman Sachs. He rejected the notion, and said he was unaware whether the G-30 was funded by the investment bank.

Draghi was vice-chairman and managing director of Goldman Sachs between 2002 and 2005, and the EU ombudsman is currently investigating whether this compromises Draghi. The ECB issued a response saying it did not consider there to be any conflict.

The ECB also announced it would continue its main refinancing operations (MROs) as fixed rate tender procedures with full allotment for "as long as necessary", and at least until July 9 2013. Furthermore, the central bank did not announce any additional longer-term refinancing operations (LTROs).

McKeown noted the ECB would be providing unlimited liquidity to commercial banks at one-week and three-month maturities, but would not offer any longer-term funds after Draghi conceded the central bank's previous one- and three-year funds had not found their way into the wider economy.

The Bank of England's Monetary Policy Committee also held its interest rate at 0.5% today, while maintaining its quantitative easing programme at the existing level of £375 billion ($604 billion).