ECB lowers its inflation and growth forecast

ECB president Mario Draghi says developments in emerging markets can further affect global growth adversely via trade and confidence effects.
ECB president Mario Draghi says developments in emerging markets can further affect global growth adversely via trade and confidence effects.PHOTO: REUTERS

The bank also keeps interest rates at record low levels and promises to prolong bond-buying programme

BRUSSELS • The European Central Bank (ECB) cut its inflation and growth forecasts for the euro zone yesterday and its president said things could get worse.

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

The ECB left interest rates at record lows yesterday as expected. The 25-member Governing Council kept the main refinancing rate at 0.05 per cent at its meeting in Frankfurt.

The deposit rate and the marginal lending rate stayed at minus 0.2 per cent, and 0.3 per cent, respectively.

The ECB has been buying €60 billion (S$94.50 billion) worth of assets, mostly government bonds, each month since March and plans to continue doing so until September 2016 in a bid to bring inflation back to its target of near 2 per cent.

It said inflation was not rising as quickly as it had planned and that the euro zone economy was not recovering at the pace expected.

"The risks to the euro area growth outlook remain on the downside, reflecting in particular the heightened uncertainties related to the external environment," ECB president Mario Draghi said. "Current developments in emerging-market economies have the potential to further affect global growth adversely via trade and confidence effects."

Six months after the ECB started a €1.1 trillion quantitative-easing programme, weaker commodity prices, a rout in global equities and China's slowdown are stoking concerns that it will struggle to revive consumer prices.

Dr Draghi repeated a pledge to change the programme if necessary.

"The Governing Council will closely monitor all relevant incoming information," he said. "It emphasised its willingness and ability to act if warranted by using all the instruments available within its mandate and, in particular, recalls that the asset-purchase programme provides sufficient flexibility in terms of adjusting the size, composition and duration of the programme," Dr Draghi told a news conference.

Stocks extended gains in Europe and bonds advanced after Dr Draghi vowed to use all tools within his mandate to support the recovery. Equities had gained around the world as a two-day holiday in China provides a respite from the country that's been at the centre of recent global volatility.

Dr Draghi said the ECB expanded the scope of its monetary stimulus while lowering its forecast for euro-area economic expansion amid a slowdown in demand from emerging markets.

The ECB cut its outlook for inflation and growth up to 2017.

Officials see consumer prices barely growing this year with an increase averaging 0.1 per cent. Inflation will then accelerate to 1.1 per cent in 2016 and 1.7 per cent the next year, Dr Draghi said.

The economy will grow 1.4 per cent in 2015 and reach a pace of 1.8 per cent two years later, he said.

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on September 04, 2015, with the headline 'ECB lowers its inflation and growth forecast'. Print Edition | Subscribe