THE EUROPEAN Central Bank yesterday said euro zone growth this year would be much stronger than expected, but betrayed worries about the outlook by warning that its forecasts could prove over-optimistic and extending into 2011 the supply of emergency liquidity to the region’s banks.
Jean-Claude Trichet, ECB president, said the “very substantial” upward forecast revision followed an exceptional recent growth spurt. Although growth would cool in the second half of the year, he expected a continuing “positive underlying momentum” in the euro zone, and again ruled out a “double dip” back into recession.
However, the ECB president surprised analysts by warning that risks to the outlook were “slightly tilted to the downside”, indicating a lack of faith in the ECB staff’s forecasts.
Risks included weaker growth “in other advanced economies” – an obvious reference to the US although Mr Trichet said the ECB had never expected “extraordinarily dynamic” growth on the other side of the Atlantic.
The ECB’s caution about its economic forecasts reflected fears about raising false expectations. For this year it expected growth in a range with a midpoint of 1.6 per cent compared with 1 per cent anticipated in June. For 2011, it expected 1.4 per cent growth, compared with the 1.2 per cent expected previously.
Mr Trichet also hinted at disagreements on the ECB’s 22-strong governing council over the pace at which it is unwinding exceptional measures taken to support the euro zone banking system since the collapse of Lehman Brothers in late 2008.
The ECB would continue “for as long as necessary” – and at least until early 2011 – to match in full banks’ demands for weekly and monthly liquidity at the prevailing main policy interest rate, which was left yesterday at 1 per cent.
For the rest of 2010 it would also match in full demand for three-month liquidity, but at an interest rate that would rise if the policy rate rose during the period.
With ECB interest rates expected to remain firmly on hold well into 2011, the additional condition imposed on three-month operations appeared a technicality. However, by creating some room for manoeuvre it pointed to impatience among some council members to form an “exit strategy”.
Mr Trichet admitted the decisions on future liquidity operations had been reached by “consensus” rather than unanimity.
“It looks like some mild disagreement on how you get the ‘exit’ going,” said Erik Nielsen, European economist at Goldman Sachs.
The ECB regards the provision of unlimited liquidity to banks as an alternative to “quantitative easing”. Although it worries about creating distortions in the banking system, demand for emergency help remains high from banks in countries hit by this year’s crisis over public finances – Ireland, Spain, Portugal and Greece.
Mr Trichet said dismantling such support was “a process”, and the ECB would “accompany the normalisation of the market”.
The Frankfurt-based institution was encouraged by new details of euro zone GDP in the second quarter, showing the 1 per cent rise compared with the previous three months being powered largely by domestic demand. Consumer spending rose by 0.5 per cent – the biggest quarterly increase since the third quarter of 2007. – (Copyright The Financial Times Limited 2010)
