The European Central Bank said today that it expected a much sharper recession this year in the euro zone than earlier forecast, unveiling details of how it will pump cash into the economy while it kept interest rates on hold.
The bank's new staff forecasts predicted the euro zone economy would now shrink by up to 5.1% this year and signalled it would also struggle to grow in 2010 - forecasting a change in GDP of between -1% and 0.4%.
Inflation would not return to positive territory until the end of this year and was 'firmly anchored', ECB President Jean-Claude Trichet said, detailing unchanged forecasts for price growth next year of between 0.6-1.4%. This indicates that interest rates will remain low for some time. The bank targets inflation at near but below 2%.
'After the extremely weak first quarter, activity over the remainder of this year is expected to decline at much less negative rates. After a stabilisation phase, positive quarterly rates are expected by mid 2010,' Mr Trichet said.
Earlier the bank kept its key interest rate on hold at 1% and markets' attention was focused on the details of its plans to buy €60 billion in covered bonds and clues on whether rates would be cut further.
Mr Trichet said the bank would spread the purchases across the euro zone, buying bonds rated at least AA or equivalent, in both primary and secondary markets. He said the purchases would be completed by the end of June next year.
All but two of the 78 analysts polled correctly forecast the ECB's decision to keep the main refi rate at a record low 1% at its monthly policy meeting.
Trichet won't rule out more rate cuts
Most analysts believe ECB rates have reached their lowest point and will stay there until at least the end of next year. However, questions remain on the chances of their falling later.
Mr Trichet said that he did not rule out lower rates in future. 'As regards the question on interest rates, I would say that they are appropriate,' Trichet said.
'I have nothing to add or to change to what I said last time - that we did not decide today that our present level was the lowest we could go,' he added.
The €60 billion covered bond purchase programme aims to help the euro zone economy out of recession by lowering long-term borrowing costs.
The euro zone's economy shrank 4.8% in the first quarter of the year from the same period a year earlier and the ECB had been more cautious than some of its peers about whether there are signs the economy might be about to recover.
