ECB chief sees no economic rebound this year

The eurozone economy shows little sign of recovering before the year-end despite an easing of financial market conditions, European Central Bank Mario Draghi said on Thursday (8 November) after interest rates were left at a record low.

The ECB held its main rate at 0.75%, deferring any cut in borrowing costs while it waits for a cue to use its new bond-purchase programme. That wait may be prolonged after Spain successfully completed its 2012 funding at affordable rates on capital markets on Thursday.

The central bank has said it is ready to buy bonds of debt-strained governments such as Spain and Italy once they sign up to a European bailout programme with strict conditions, under a programme dubbed Outright Monetary Transactions (OMTs).

So far no request has been made, but the announcement alone has calmed markets.

"Economic activity in the euro area is expected to remain weak although it continues to be supported by our monetary policy stance and financial market confidence has visibly improved on the back of our decisions," Draghi told a news conference.

Gloomy data this week indicated the eurozone economy will shrink in the fourth quarter, which the ECB could eventually respond to by cutting rates.

Recent survey evidence gave no sign of improvement towards the end of the year and the risks surrounding the euro area remain on the downside, Draghi said.

He signalled the ECB would downgrade its GDP forecasts next month, describing "a picture of weaker economies", and said inflation would remain above the ECB's target for the rest of the year, before falling below two percent during in 2013.

Before making any decision to cut rates further, the ECB will focus on making sure that its looser policy reaches companies and households across the eurozone, a mechanism that has been broken by the bloc's debt crisis.

The new bond purchase plan is the ECB's designated tool but it can only be activated once a eurozone government requests help from the bloc's rescue fund and accepts policy conditions and strict international supervision.

"We are ready to undertake OMTs which will help to avoid extreme scenarios, thereby clearly reducing concerns about the materialisation of destructive forces," Draghi said.

Asked whether he could imagine an extreme scenario in which the bank began buying bonds without conditions, he said the answer was 'no'.

Investors and eurozone policymakers have been urging Spain to seek aid but Spanish Prime Minister Mariano Rajoy has so far avoided requesting help, saying he wants assurances that ECB intervention would bring down Spain's debt costs.

Spain sold €4.8 billion of debt including its first longer-term issue in 18 months on Thursday, enough to complete its 2012 financing programme and begin raising funds for next year. So there is little immediate pressure on that front.

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