ECB Says Euro-Area Economy to Gradually Recover Later in 2013

The European Central Bank said the economy should gradually recover later this year, aided by its loose monetary policy.

Contained inflation expectations allow monetary policy “to remain accommodative,” the Frankfurt-based ECB said in its monthly bulletin published today. “Later in 2013 economic activity should gradually recover, supported by a strengthening of global demand and our accommodative monetary policy stance.”

The ECB cut its forecasts last week and now expects the 17-nation euro-area economy to contract 0.5 percent this year before growing 1 percent in 2014. It sees inflation slowing to 1.3 percent next year, well below its 2 percent limit.

While officials discussed cutting borrowing costs last week, the “prevailing consensus” was to leave the benchmark rate unchanged at a record low of 0.75 percent, ECB President Mario Draghi said on March 7.

Risks to the economic outlook remain on the downside and inflation risks are broadly balanced, the ECB reiterated in today’s bulletin.

While Draghi indicated in February that the strength of the euro posed a downside risk to inflation, he omitted such remarks at last week’s press conference and said that the euro is broadly in line with its long-term average.

Concerns that low borrowing costs aren’t being properly transmitted to small and medium-sized companies in some nations have stoked speculation that the ECB may introduce additional measures to encourage bank lending. “We always think and study and reflect, but we are not committing to or planning anything special,” Draghi said last week.

The ECB’s Governing Council “is closely monitoring conditions in the money market and their potential impact on the stance of monetary policy and the functioning of the transmission of its monetary policy to the economy,” the central bank said today.

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