The President of the European Central Bank, ECB, Mario Draghi, speaks during a press conference in Frankfurt, central Germany, Thursday Dec. 6, 2012. The European Central Bank left rates unchanged at its meeting Thursday, and Mario Draghi gave little sign the bank was willing to add more stimulus. He said the bank had already done much to lower borrowing costs in heavily indebted countries that are struggling to grow. (AP Photo/dapd/ Alex Domanski)

Eva Kuehnen Frankfurt

THE EURO zone economy was likely to shrink next year as it had this year, the European Central Bank (ECB) predicted yesterday, sharply downgrading its outlook even as it held its key interest rate at a record low 0.75 percent.

The bank’s new staff projections put gross domestic product (GDP) in a range of falling by 0.9 percent to growing by just 0.3 percent next year, suggesting contraction is far more likely than not. ECB president Mario Draghi said downside risks prevailed.

In September, the ECB’s staff had pencilled in a significantly higher range of 0.4 percent contraction to 1.4 percent expansion for the euro zone economy.

“Economic weakness in the euro zone is expected to extend into next year,” Draghi said after the central bank’s monthly policy meeting.

“Later in 2013, economic activity should gradually recover as global demand strengthens and our accommodative monetary policy stance and significantly improved financial market confidence work their way through the economy.

“The governing council continues to see downside risk to the economic outlook for the euro area,” he said. “These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area.”

A political impasse over US financial policy, which could presage steep tax hikes and budget cuts if a deal was not reached, could also dampen sentiment for longer, he said.

The level of uncertainty was reflected in the ECB’s first attempt to forecast 2014, for which it pencilled in growth of between 0.2 percent and 2.2 percent. The midpoint forecast for this year was pushed slightly lower to minus 0.5 percent.

Draghi said rates had not not lowered because there were high indirect taxes and increasing energy prices in some euro zone countries.

“There was a wide discussion… but the consensus was to leave the rates unchanged,” he added, a hint that opinions differed about what course to take.

He also said policymakers had discussed setting a negative rate on the ECB’s deposit facility in an attempt to encourage banks not to hoard cash at the ECB but lend it into the real economy instead.

German bund futures rose in response to that and the euro came under pressure.

The central bank would continue to supply euro zone banks with all the liquidity they asked for in the ECB’s refinancing operations at least until July next year, Draghi said. – Reuters