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ECB cuts growth forecast

Source : BUSINESS_STANDARD
Last Updated: Fri, Dec 07, 2012 13:12 hrs

pAcknowledging that the economy is likely to remain weak into next year the European Central Bank sharply reduced its growth forecast for the Euro zone Thursday as it left its main interest rate unchanged at a record lowppIn something of a reversal from earlier optimism that the economy would start to recover next year the bank&rsquos president Mario Draghi announced that the prediction was now for somewhere between growth of 03 per cent of gross domestic product and a contraction of 09 per cent That compares with a previous forecast of 05 per cent growthpp&ldquoAvailable statistics and survey indicators continue to signal further weakness in activity in the last quarter of the year&rdquo Draghi said adding that &ldquoweak activity is expected to extend into next year&rdquoppAmong the risks that could hamper future growth Draghi listed &ldquouncertainties about the resolution of sovereign debt and governance issues in the euro area geopolitical issues and fiscal policy decisions in the United States&rdquoppHe expressed confidence that European leaders would reach agreement soon on a unified regulatory framework for banks but he insisted that such a system cover all 6000 banks in the region &mdash a position that is sure to displease Germany which wants to retain control over the small banks that do most of the lending in that countryppNational regulators have been criticised for failing to force their banks to confront their problems delaying a resolution of the Euro zone crisispp&ldquoOne should aim at having this mechanism covering all euro area banks&rdquo Draghi said warning that failing to do so could lead to the stigmatising certain banks &ldquoYou want to avoid fragmentation in the banking market You want to keep a level playing field&rdquoppThe decision to leave the benchmark interest rate at 075 per cent was an acknowledgment that policy makers need to look for alternative ways of stimulating the persistently moribund economyppThe central bank&rsquos benchmark rate has lost much of its power to influence market rates in troubled corners of the euro zone Credit remains expensive in countries like Portugal and Italy because of lingering fear among lenders that the Euro zone could splinterppAs a result Draghi has searched for other means to stimulate lending in particular by pledging to buy bonds of troubled countries like Spain to help contain their borrowing costs and remove fear of euro breakup So far the mere threat of ECB bond buying has been enough to push down rates on government bondsppBut many economists wonder how long the tenuous calm on debt markets can lastppInflation in the Euro zone has fallen close to the ECB&rsquos official target of 2 per cent leaving room for a rate cut Still a cut would have been a surprise The central bank &ldquohas explained before that it thinks such a cut would have no impact on the economy as the transmission mechanism remains impaired&rdquo Marie Diron an economist who advises the consulting firm Ernst & Young wrote in an emailppDraghi gave no clear indication whether a rate cut had been discussed among the central bankers saying only that &ldquothere was a wide discussion but in the end the prevailing decision was to leave the rates unchanged&rdquoppSome members of the ECB governing council may well have been concerned that a rate cut would use up one of the last policy weapons they have leftpp&ldquoThe ECB is out of ammo&rdquo Carl Weinberg chief economist at High Frequency Economics in Valhalla New York wrote Wednesday in his daily memo to clients &ldquoWe cannot imagine what it might do at its meeting tomorrow that would make any difference&rdquophr p pp alignrightem© 2012 The New York Times News Serviceemp

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