ECB cuts projection for growth, inflation in euro zone

THE European Central Bank has cut its inflation and growth forecasts for the euro zone yesterday and its president said things could get worse.

The euro fell one per cent on the moves and comments, hitting a two week low.

The ECB president, Mario Draghi, pledged to beef up or prolong the bank’s bond-buying program if the picture indeed darkened further, although he said no one on the bank’s Governing Council had argued for it now.

The ECB, which left interest rates unchanged in a widely predicted decision, said the chances of missing its medium-term inflation target had increased due to lower oil prices, weaker growth in China and other emerging markets and an appreciating euro.

Draghi said the bank’s 1 trillion euro-plus asset-buying program was working smoothly, if slowly, and the policy-making Governing Council was ready and willing to take further policy action but decided it would premature to do so now.

“In particular (the council) recalls that the asset purchase program provides sufficient flexibility in terms of adjusting the size, composition and duration of the program,” he told a news conference.

In one small change to the quantitative easing program, the bank agreed to increase the share of any sovereign bond issue it could buy to 33 percent from 25 per cent, provided that did not give it a blocking minority among bondholders.

The ECB forecast that inflation would be a mere 0.1 percent this year, 1.1 percent in 2016 and 1.7 percent in 2017, compared with its June projections of 0.3, 1.5 and 1.8 per cent respectively.

It lowered its forecast for growth in the 19-nation euro area to 1.4 per cent in 2015, 1.7 percent next year and 1.8 per cent in 2017, from June projections of 1.5, 1.9 and 2.0 per cent respectively.

The forecasts, meanwhile, were compiled based on data taken before Aug. 12 and did not take into account the latest sharp economic deterioration in China, which posed “downside risks to the projections themselves”, Draghi said.

However, he said the council tended to think the weaker inflation outlook was due to “transitory effects” but would closely monitor all relevant factors.

Draghi confirmed the ECB had cut Emergency Liquidity Assistance (ELA) to Greek banks for the second time in two weeks.

The ECB launched its 60 billion euro ($68 billion) per month quantitative easing program in March to boost consumer prices after a short bout of deflation. It is due to run until September 2016 but Draghi clearly hinted it could be extended.

The International Monetary Fund argued on Thursday that the ECB should consider extending QE, citing a rise in downside risks to the global economy due to a combination of threats, including China’s slowdown and rising market volatility.

Oil prices are down 35 per cent since May, iron ore is near an all-time low, the euro has unexpectedly firmed and Chinese growth, already a worry for the ECB in July, is slowing sharply. One of the bank’s favored gauges of inflation expectations, the five-year, five-year euro zone breakeven forward, has fallen below 1.7 percent from 1.85 per cent in July.