The European Central Bank said some of the risks to the economic outlook it had warned about have materialized, damping inflation pressures and prompting policy makers to cut interest rates to a record.
“Inflationary pressure over the policy-relevant horizon has been dampened further as some of the previously identified downside risks to the euro-area growth outlook have materialized,” the Frankfurt-based ECB said in its monthly bulletin today. The report echoes statements of ECB President Mario Draghi at a press conference on July 5.
The ECB last week lowered interest rates by 25 basis points, taking the benchmark to a record low of 0.75 percent and the deposit rate to zero. Policy makers next decide on rates on Aug. 2. With the sovereign debt crisis already forcing five euro members into a bailout and threatening to tip the 17-nation euro economy into recession, Draghi signaled on July 9 that policy makers may be open to another rate cut.
“Economic growth in the euro area continues to remain weak, with heightened uncertainty weighing on confidence and sentiment,” the ECB said. The euro economy will shrink 0.3 percent this year, according to the European Commission.
Slower economic growth in Europe and elsewhere also damps demand for oil, the main price driver. Euro-area inflation weakened to 2.4 percent in May from 2.6 percent in April.
Oil prices have dropped about 22 percent since the end of February and are down 10 percent from a year ago, meaning “underlying price pressures should remain moderate” and inflation risks “are broadly balanced,” the ECB said.
The euro area’s inflation rate will fall below the ECB’s 2 percent ceiling in 2013, the ECB said in the report.