ECB sees 'high uncertainty', 'downside risks' for economy

3rd November 2011, Comments 0 comments

The European Central Bank's new chief Mario Draghi said he saw "high uncertainty" and "intensified downside risks" for the eurozone economy in coming months.

The current economic outlook for the 17 countries which share the euro "is subject to particularly high uncertainty and intensified downside risks," Draghi said, speaking after the ECB cut its key rates by a quarter of a percentage point.

Some of the risks to growth were already materialising and this "makes a significant downward revision to forecasts and projections for average real GDP (gross domestic product) growth in 2012 very likely," Draghi said.

The decision to cut rates came as a surprise, not least because area-wide inflation is currently at 3.0 percent, way above the ECB's definition of price stability, which is just below but close to 2.0 percent on a 12-month basis.

"While inflation has remained elevated and is likely to stay above 2.0 percent for some months to come, inflation rates are expected to decline further in the course of 2012 to below 2.0 percent," Draghi said.

Turning to economic growth, which slowed to 0.2 percent in the second quarter, it was "expected to be very moderate in the second half of this year," Draghi said.

Indeed, looking further ahead, "a number of factors seem to be dampening the underlying growth momentum in the euro area, including a moderation in the pace of global demand and unfavourable effects on overall financing conditions and on confidence resulting from ongoing tensions in a number of euro area sovereign debt markets," he said.

The main obligation laid by treaty on the ECB is to ensure price stability, but in taking decisions it looks ahead to likely pressures on prices in about 18 months' time. Slowing growth usually points to easing inflation pressures.

© 2011 AFP

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