From The Times
June 5, 2009

ECB slashes forecasts for eurozone

Gary Duncan, Economics Editor

The European Central Bank spurned pressure for more radical action to jumpstart the eurozone economy yesterday, sticking to a gradual, step-by-step strategy despite savagely cutting its forecasts for the 16-nation bloc.

In drastic downgrades to its assessment of the eurozone’s prospects, the ECB said that it expects GDP to plummet this year by between 4.1 and 5.1 per cent — a far deeper slump than the 2.2 to 3.2 per cent decline it foresaw only three months ago.

The Frankfurt-based central bank also unveiled a far bleaker view of recovery prospects for next year, warning that the eurozone recession will drag on into next summer.

It now forecasts that GDP will tumble by up to a further 1 per cent in 2010, and at best grow by a meagre 0.4 per cent. That compares with its March prediction for GDP to shrink by no more than 0.7 per cent, and possibly expand by as much as 0.7 per cent.

Despite this grim view, the ECB again held official eurozone interest rates at 1 per cent.

Jean-Claude Trichet, the ECB President, also unveiled further details of plans to pump extra cash into the eurozone economy by buying up €60 billion of covered bonds — securities that are mainly linked to eurozone mortgage lending.

The ECB’s announcements came as the Bank of England pegged UK interest rates at 0.5 per cent for a third month in a row.

The Bank also confirmed that it would leave unchanged its plans for £125 billion of asset purchases under its quantitative easing scheme to boost the flow of cash and credit through Britain’s economy.

Mr Trichet indicated that the ECB’s covered bond purchases would not amount to quantitative easing, since they would be “automatically sterilised” — that is, the value of purchases would be offset as it would substitute for other ECB action in the markets.

Despite that, the ECB’s plan remains controversial and this week drew fire from Angela Merkel, the German Chancellor, who accused the central bank of having “bowed to international pressure”.

She claimed that unconventional actions by central banks worldwide risked worsening the global economic crisis.

Mr Trichet, though, said he had received assurances from Mrs Merkel. “I was extremely happy that the Chancellor could confirm that she was fully backing our independence and appreciated what we were doing,” he said.