The European Central Bank has cut its growth forecast for the troubled euro area’s economy, but said there were enough signs of improvement ahead that it did not need to cut interest rates.
Bank President Mario Draghi said the economy of 17 European Union countries that use the euro would shrink 0.6 percent this year compared with the previous forecast of a 0.5 percent decline. The ECB stuck with its forecast that the eurozone would leave its protracted recession and begin to see growth by the end of the year.
Draghi spoke Thursday at a news conference after the bank left its key interest rate unchanged at a record low 0.5 percent.
He said recent surveys of economic optimism had shown improvement and the economy “should stabilize and recover in the course of the year.”
The bank also increased its forecast for next year to 1.1 percent growth from 1.0 percent growth.
Draghi said that while some indicators, such lending to companies, were downbeat others, including business sentiment, had improved. The consensus, after a “very rich discussion” on the bank’s 23-member governing council, was that there “wasn’t any directional change that would justify taking action at this time,” Draghi said.
The eurozone’s economy shrank 0.2 percent in the first quarter compared with the previous quarter, the sixth straight quarterly contraction. Unemployment is at 12.2 percent, highest since the euro was introduced in 1999. Growth lags as governments cut spending to reduce the excessive levels of debt that threatened the eurozone with break up last year.
Draghi added that the bank’s governing council had discussed a wide range of measures that go beyond interest rates to help stimulate the eurozone economy. These so-called unconventional measures include charging banks to keep money at the ECB by lowering its deposit rate to below zero, looking at ways to use financial markets to increase lending for small businesses, and more central bank lending to banks.
But in the end, he said, “we see no reason to act on all these fronts. These are all measures we keep on the shelf.”
The ECB’s key task is to get credit flowing to companies, particularly the small and medium-sized firms that create the most new jobs. Even record low interest rates have not been passed on by banks in the hardest hit parts of the eurozone. So the ECB is looking at other measures such as encouraging banks to package and sell loans to small businesses, a process that would free up more money to lend. But that will take time to set up.
Draghi held open the door to a rate cut if things worsen, saying that the bank would “monitor” very closely how the economy is doing.
One thing the ECB has avoided is pumping new money into the economy by purchasing securities from financial institutions — as the U.S. Federal Reserve and the Bank of Japan have done. The step, known as quantitative easing, can lower long term interest rates, raise asset prices and boost employment. But the ECB faces resistance to such a step from the German Bundesbank central bank, and could face criticism that it is stretching its mandate.