EU outlook remains cloudy

European Central Bank President Mario Draghi said interest rates remain supportive and policy makers still expect a gradual economic recovery this year even as latest data cloud the outlook.

Latest indicators “are not enough to change our baseline scenario, which foresees a gradual recovery in the course of the year,” Draghi said at a Press conference in Barcelona on Thursday after the ECB held its benchmark interest rate at a record low of one per cent. “We didn’t discuss any specific move in interest rates but we did discuss our general monetary policy stance, which we found accommodative in view of an economic outlook that becomes more uncertain.”

Austerity measures aimed at stemming the debt crisis have pushed economies from the Netherlands to Spain back into recession. The ECB, which has pumped more than €1 trillion ($1.3 trillion) into the financial system since last year in an effort to avert a credit crunch, may be unwilling to add to stimulus as it presses governments to enact reforms and take responsibility for the crisis. “Addressing divergences among individual euro-area countries is the task of national governments,” Draghi said. “As concerns the monetary policy stance of the ECB, it has to be focused on the euro area. Our primary objective remains to maintain price stability over the medium term.”

The euro rose after Draghi’s comments to $1.3171 from $1.3117 before the Press conference started.

Investors had increased bets on rate cuts after Draghi last week indicated the ECB was reassessing the economic and price outlook. Inflation will remain above the ECB’s two per cent limit this year before slowing in 2013, Draghi said.

“Risks to the outlook for inflation rates in the coming years are still to be seen as broadly balanced,” he said. Last month he spoke of short-term “upside risks” to inflation. The economic outlook remains subject to downside risks, Draghi said.

After rising in January and February, a gauge of euro-area manufacturing plunged in April to the lowest in almost three years, according to London-based Markit Economics. The index, based on a poll of purchasing managers, shows that manufacturing activity has contracted for nine straight months.

The ECB is due to issue new projections next month. In March, it revised down its 2012 economic outlook to a contraction of 0.1 per cent from an expansion of 0.3 per cent. The central bank also raised its 2012 inflation forecast to 2.4 per cent from two per cent.

“We saw stabilising economic activity at low levels in the first three months” of the year, Draghi said. “The most recent survey indicators show uncertainty prevailing. We will be clearer in our assessment next month.”

Draghi indicated the central bank’s emergency measures will remain in place for the time being. “Any exit strategy remains premature,” he said. —