Central bank cuts eurozone outlook

— The European Central Bank warned Thursday of another gloomy year for the 17 European Union countries that use the euro, cutting its forecast for economic growth in 2013 from plus 0.5 percent to minus 0.3 percent.

Even so, the bank left rates unchanged at its meeting, and central-bank leader Mario Draghi gave little sign he was leaning toward any more cuts to stimulate growth.

The bank’s 22-member governing council kept its benchmark refinancing rate unchanged at 0.75 percent. The rate determines what private-sector banks are charged for borrowing from the central bank, and, through that, the rates banks set for businesses and consumers.

Draghi saw “downside risk to the economic outlook” and said “weak activity is expected to extend into next year,” with a gradual recovery later in 2013. The bank’s minus 0.3 percent outlook is the midpoint of the forecast rate of between minus 0.9 percent and plus 0.3 percent.

The European Central Bank’s revised forecasts come as the eurozone’s economy is caught in a recession — having shrunk 0.1 percent in the third quarter after a 0.2 percent fall in the previous three months. It is expected to contract again in the last three months of the year. A recession is often defined as two quarters of negative growth in a row.

Growth is being held back across the eurozone as governments cut spending and raise taxes. Countries are trying to reduce debt piled up from overspending, in the case of Greece, or from real-estate bubbles and banking crises, as in Spain and Ireland. Greece, Portugal, Ireland and tiny Cyprus have already needed bailouts, and Italy and Spain, the eurozone’s third- and fourth-largest economies, teetered on the edge of needing help this summer.

Analysts saw the lowered forecasts as confirmation of more tough times to come for the eurozone.

“This is something that we have been flagging for some time, namely that the eurozone may be headed for a ‘lost decade,”’ said Marie Diron, a senior economic adviser at Ernst & Young.

European share indexes held onto gains after the speech, with the London FTSE up 0.3 percent, Germany’s DAX up 1.11 percent and the French CAC 40 up 0.4 percent. The euro dipped 0.8 percent to $1.2967 as some investors thought the dismal outlook raised the chance of a rate cut. Lower rates can make a currency less attractive by lowering returns on interest-bearing investments.

In theory, a rate cut by the central bank could stimulate the eurozone’s economy by making it easier to borrow, spend and invest. But rates are already low, and borrowing remains weak.

Draghi said current rates were “very accomodative” — meaning they are low enough to encourage growth.

He also said that that the central bank had already done much to lower rates with its plan announced in September to buy unlimited amounts of bonds issued by Europe’s heavily indebted countries. The purchases would help drive down bond interest rates, which in turn would lower borrowing costs for indebted countries such as Spain and Italy and make their debt loads easier to manage.

Business, Pages 27 on 12/07/2012

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