ECB Says Rate Cut Is Consistent With Low Inflation in Euro Area

The European Central Bank said low inflation in the 17-nation euro area allowed policy makers to cut interest rates last week, as economists lowered forecasts for consumer prices and economic growth.

The decision was “consistent with low underlying price pressure over the medium term,” the Frankfurt-based ECB said in its monthly bulletin today, echoing President Mario Draghi’s May 2 policy statement. Inflation expectations are “firmly anchored” and lower borrowing costs “should contribute to support prospects for a recovery later in the year,” it said.

The ECB reduced its benchmark rate to a record low of 0.5 percent last week and extended unlimited liquidity supply to euro-region banks until mid-2014. Policy makers are ready to cut rates again if needed and are open to taking the deposit rate below zero, Draghi said on May 6.

“The monetary policy stance will remain accommodative for as long as needed,” the ECB said. “In the period ahead, the Governing Council will monitor very closely all incoming information on economic and monetary developments and assess any impact on the outlook for price stability.”

To help ensure its low rates are reaching the parts of the economy that need them most, policy makers agreed to explore options to rekindle the market for asset-backed securities and stimulate lending to smaller companies.

With risks to the economic outlook still on the downside, professional forecasters cut their estimates for growth and inflation for this year and next.

The economy will contract 0.4 percent in 2013, before growing 1 percent in 2014, they said. In February, economists had predicted stagnation, followed by growth of 1.1 percent. Inflation is seen at 1.7 percent this year and 1.6 percent next year, down from the 1.8 percent forecast for both years three months ago.

The ECB will publish its staff projections next month.

To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net; Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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