ECB Lowers Growth Forecast

The Wall Street Journal

By TOM FAIRLESS

FRANKFURT—European Central Bank President Jean-Claude Trichet warned Thursday that the euro zone's economy will grow more slowly than previously expected, and said risks to medium-term inflation have moderated.

But he stopped short of clearly signalling a change in the bank's interest-rate path.

Speaking at his monthly press conference, Mr. Trichet said the bank sees "intensified downside risks" to the economic area in an environment of "particularly high uncertainty".

That assessment of the economic outlook is more pessimistic than the previous month's, when Mr. Trichet only warned of "particularly high" uncertainty.

The ECB's staff now expect the euro zone's economy to grow by between 1.4% and 1.8% in 2011, down from a June estimate of 1.5% to 2.3%, and to grow between 0.4% and 2.2% in 2012, down from 0.6% to 2.8%, Mr. Trichet said.

Risks to the medium-term prices outlook are now "broadly balanced," rather than last month's assessment of "to the upside," he said.

Analysts interpreted the comments to mean the ECB has put its rate-rise cycle on hold, and that it could consider cutting rates if economic conditions deteriorate.

"With a combination of downside risks to growth and balanced risks to price stability, further rate hikes are off the table," said Carsten Brzeski, an economist at ING Bank in Brussels.

"Faced with extremely elevated uncertainty, the next rate change could be either way," said Marco Valli, chief euro-zone economist at UniCredit in Milan. But a "more aggressive revision" to next year's growth projection is probably needed before the ECB starts cutting rates, he added.

Mr. Trichet's comments were enough to send the euro down sharply against the dollar. The single currency fell to $1.3984 from $1.4046 at the start of the conference, before rallying to $1.4006 by late afternoon in Europe.

Still, Mr. Trichet reiterated that the bank's monetary-policy stance remains "accommodative", and said the bank will continue to "monitor very closely" all developments.

He repeated that inflation is likely to remain "clearly above" 2% in the coming months, with upside risks emanating from high energy prices. The bank's staff still expect inflation to come in between 2.5% and 2.7% in 2011.

Mr. Trichet defended the bank's recent purchases of peripheral euro-zone government bonds, saying the program has "delivered stability." The ECB has bought bonds worth some €55 billion ($77.53 billion) since reactivating the program at its August meeting to stem the spread of the euro zone's debt crisis.

But he indicated that the ECB will stop the program once the euro zone's rescue fund, the European Financial Stability Facility, wins approval from national governments to buy bonds.

Mr. Trichet warned of "tightened" financing conditions in the euro zone, but didn't announce any new liquidity measures. "Liquidity is not an issue for the banking sector as a whole," he said.

Earlier Thursday, the ECB left its benchmark interest rate unchanged at 1.5%. The decision was unanimous, Mr. Trichet said.

Write to Tom Fairless at tom.fairless@dowjones.com