Following an earlier announcement that the European Central Bank would hold interest rates at 1.5%, the ECB cut its economic growth forecast for the coming year and warned that growth could slow to a near standstill in 2012. ECB President Jean-Claude Trichet said in a press conference today that the bank had downgraded its forecast for growth in 2011 from 1.8% to 1.4%, and expects growth in 2012 to be between 0.4% and 2.2%. Both are down from earlier forecasts.
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However, Trichet stopped short of saying the euro zone is at risk of another recession, saying that it is difficult to make forecasts, given the current situation. “There is an enormous level of uncertainty,” said Trichet, adding that it was not just Europe facing economic uncertainty, but major economies around the world. The U.S. Federal Reserve has also cut its growth forecast earlier this summer, though its 2012 growth estimate of 3.3% to 3.7% is well above the ECB’s estimates.
The one upside to slowing growth is that it should lower inflation. This morning it was announced that year-on-year inflation rate is holding steady at 2.5%, well above ECB’s target of just under 2%. Trichet said the ECB staff now forecasts less risk of price increases going forward, a positive note considering the ECB’s sole mandate is for price stability, unlike in the U.S., where the Federal Reserve has a dual mandate for stable prices and full employment.
In July, the ECB raised interest rates despite weakness sparked by inflationary pressures. Many are wondering whether the ECB will now cut interest rates, but Trichet dodged that question today, saying only that the decision to leave rates unchanged was unanimous.
Trichet also spoke on sovereign debt concerns. He reiterated the importance that countries at risk of default — Greece, Portugal, Ireland, Italy, and Spain — move ahead with budget cuts. He also said that it is important for stronger European economies to participate in their bailout funds. “This is our working assumption and also our goal,” said Trichet. The ECB has been buying up sovereign debt over the past month in an effort to stabilize the banking system, and recently began buying Italian and Spanish bonds while the broader bailout fund is being set up. Trichet says the bailout fund will make the bond purchases in the future.