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MENAFN - AFP - 06/12/2012

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(MENAFN - AFP) The European Central Bank slashed its eurozone growth forecasts Thursday, keeping the door open to more interest rates cuts, even as it insisted it was up to governments to solve the debt crisis.

As widely expected, the ECB's decision-making governing council voted to leave the bank's main refinancing rate at a historic low of 0.75 percent at its last policy meeting this year.

But ECB chief Mario Draghi -- who last month had said further rate cuts were not discussed at all -- revealed there had been "wide discussion" of such a move this time round and the decision was anything but unanimous.

Nevertheless, "in the end the prevailing consensus was to leave the rates unchanged," the Italian central banker said.

The 23-member governing council traditionally likes any decisions to be unanimous or, failing that, by consensus.

And with economic gloom deepening over the 17 countries that share the euro, many ECB watchers believe there is room for additional monetary easing, even if none of them had predicted a cut in the bank's refi rate at this month's meeting.

The bank might be persuaded to act if economic prospects continu to deteriorate, analysts argued.

And the outlook looks gloomy indeed.

In its regular quarterly staff economic projections, the ECB forecast that the eurozone economy will contract both this year and next year and only return to growth in 2014.

According to the updated forecasts, the euro area economy is set to shrink by 0.5 percent in 2012 rather than by 0.4 percent as predicted earlier.

And it would shrink again by 0.3 percent in 2013, instead of growing by 0.5 percent.

Only in 2014 would the economy grow again, by an estimated 1.2 percent, the forecasts said.

The ECB governing council "continues to see downside risks to the economic outlook for the euro area," Draghi said.

"Over the shorter term, weak activity is expected to extend into next year."

Nevertheless, a gradual recovery should start "later" in 2013 as the ECB's low interest rate policy and rising market confidence fed through into household spending, while a strengthening of foreign demand should support export growth, he argued.

Thus, the ball was very much in the governments' court to solve the two-year-old crisis, Draghi insisted.

By cutting interest rates and launching a raft of anti-crisis measures the ECB had "already done much that is needed," he said, even if he refused to explicitly rule out additional action further down the line.

"In order to sustain confidence, it is essential for governments to reduce further both fiscal and structural imbalances and to proceed with financial sector restructuring," he insisted.

A number of ECB watchers said they still expected the central bank to lower its rates early next year if the economy deteriorated still further.

"The ECB appears to have the door open for an interest rate cut, and we expect it to step through early in 2013," said Howard Archer at IHS Global Insight.

"With the eurozone clearly facing a difficult fourth quarter and beyond after moving into modest recession in the third quarter, and with the underlying inflation situation in the Eurozone looking relatively benign, we believe that the ECB has ample justification and scope to take interest rates down from 0.75 percent to 0.50 percent sooner rather than later," he said.

But others were not so sure.

Draghi "was quite clear that no further monetary policy action is to be expected in the near future," said Marie Diron at Ernst & Young Eurozone Forecast.

Commerzbank chief economist Joerg Kraemer said he "would forecast a lower refi rate if leading economic indicators declined in contrast to our expectations."

ING Belgium economist Carsten Brzeski felt that the fact that the ECB kept rates on hold "even after these strong downward revisions for growth and inflation in our view shows that the ECB prefers to stimulate the economy with non-standard measures and not with additional rate cuts."

A rate cut "might not entirely be off the table but would require an even worse weakening of the economy," Brzeski said.


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