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Europe economic outlook worsens

Bloomberg Frankfurt and London

THE ECONOMIC outlook was worsening and the European Central Bank (ECB) stood ready to activate its bond purchase programme if governments fulfilled the necessary conditions, ECB president Mario Draghi said yesterday.

“We are ready to undertake” outright monetary transactions (OMTs), “which will help to avoid extreme scenarios,” Draghi said in Frankfurt after legislators left the benchmark interest rate at a historic low of 0.75 percent.

“The risks surrounding the economic outlook remain on the downside” and underlying inflation pressures “should remain moderate”, he said.

Draghi on Wednesday fuelled speculation that the ECB might put rate reductions back on the agenda, saying the debt crisis was starting to hurt Germany and that inflation risks were “very low”.

Still, Spain is resisting asking for a bailout that would open the door to ECB bond purchases, stalling the central bank’s efforts to repair its monetary policy transmission mechanism.

“It’s entirely up to Spain and the Spanish government to take the decision,” Draghi said. At the same time, “since the OMT announcement there had been a series of improvements” on financial markets, including “a return of flows from the rest of the world”.

Economic confidence in the euro area fell to a three-year low last month, adding to signs that the region is in recession after gross domestic product shrank 0.2 percent in the second quarter.

Draghi said the ECB would take the weakening economy into account when it published new economic and inflation forecasts next month.

“Certainly the outlook is being revised and there’s a picture of a weaker economy. We have not discussed what we’re going to do next year in terms of monetary policy,” he said.

In London, the Bank of England halted expansion of its bond-buying programme as officials shifted focus to stimulating bank lending to support a lacklustre recovery.

The nine-member Monetary Policy Committee led by governor Mervyn King said it did not plan to buy any more bonds beyond the £375 billion (R5.2 trillion) already purchased.

Yesterday’s move suggests the London-based central bank may focus on credit-boosting initiatives such as the Funding for Lending Scheme to ignite growth. Increased inflationary pressures may also have prompted policymakers to hold fire even as surveys point to renewed weakness after the UK economy surged 1 percent in the third quarter.

“The outlook for the UK economy is still uncertain,” said Roger Bootle, the founder of Capital Economics.

The Bank of England kept its benchmark interest rate at a record low of 0.5 percent.

The pound erased its decline against the dollar after the announcements and traded at $1.5996 as of 12.45pm in London yesterday. UK 10-year gilts erased an advance, pushing the yield 3 basis points higher to 1.786 percent.

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