The European Central Bank has lowered its forecast for euro zone growth this year, and signalled that a recent round of interest rate rises has come to an end.
Speaking to reporters after the bank had left its main interest rate unchanged at 1.5%, ECB president Jean-Claude Trichet said underlying momentum in the euro zone economy appeared to be dampening.
He blamed this on the euro zone debt crisis and weakening global growth. Mr Trichet said ECB staff had lowered their growth forecasts to around 1.6% this year and 1.3% next year.
He said the risks to the economic outlook are "to the downside", mainly due to particularly high uncertainty.
Mr Trichet said inflation rates were likely to stay above the bank's 2% target in the coming months, but should fall below 2% in 2012.
He said price risks were "broadly balanced". That assessment marked a change from last month, when he said there were "upside risks to price stability". The change in the ECB's inflation view suggests it has abandoned its policy tightening course and that interest rates are now on hold.
The ECB chief said the bank would "continue to monitor very closely all developments". He also said the bank would continue to ensure that European banks had access to funding.
He said measures announced by euro zone government to lower their deficits should be implemented in full. Mr Trichet also urged governments to "decisively and swiftly implement" structural reforms, particularly in labour markets.
Earlier, the ECB's policy-setting governing council voted unanimously to leave its main interest rate unchanged at 1.5% at its regular monthly meeting in Frankfurt, in a move seen by analysts as a halt to the recent cycle of monetary tightening.
Earlier, the Bank of England also held borrowing costs at a record low of 0.5% to support Britain's faltering economy.
After tightening monetary conditions in the single currency area twice in the past six months - in April and July - analysts had forecast that the ECB would vote to keep rates steady.
Not only has the economic outlook for the euro zone clouded over and investor morale is falling, but fears that Greece is on the brink of bankruptcy refuse to go away and countries such as France, Italy and Spain are having to push through additional austerity measures to get their finances back on an even keel.
On Ireland, Mr Tichet said the country was gaining credability as it follows implementation of the bail-out programme with the EU and IMF. He said that improving confidence would help growth in Ireland.
He refused to comment on Finance Minister Michael Noonan's efforts to avoid paying back the full amount of Anglo Irish Bank's senior debt. He said he had nothing to say on the matter.
