European Central Bank cuts inflation forecast for next year to 1.3 per cent

The

European Central Bank

cut its inflation forecast for next year to 1.3 per cent, down from September’s estimate of 1.5 per cent, in a sign that the recent trend of low euro zone inflation shows no sign of abating.

However the bank refrained from cutting interest rates at its governing council meeting in Frankfurt yesterday following last month’s surprise decision to lower the benchmark rate to a record 0.25 per cent.

Speaking after the meeting, ECB president Mario Draghi said the bank would keep interest rates low for the foreseeable future, but declined to be drawn on whether negative interest rates would be considered. He said the bank had a number of tools at its disposal, including further interest rate cuts.

Improvements
Mr Draghi said the decision to cut rates in November "has been shown to be fully justified", noting improvements in sovereign debt yields and a "slight reduction in fragmentation" in recent months.

The problem of financial fragmentation, which has seen borrowers in peripheral countries facing much higher borrowing costs, has been a key consideration in the ECB’s monetary decisions.

With market watchers expecting a dovish tone from Mr Draghi yesterday, European bonds weakened amid few concrete signs that the ECB was prepared to act imminently.

The bank revised upwards slightly its outlook for economic growth next year, with GDP across the euro zone expected to increase by 1.1 per cent in 2014, 0.1 of a percentage point higher than its last forecast.

GDP is expected to grow by 1.5 per cent in 2015, the bank said, in its first published outlook on 2015.

Meanwhile, German finance minister Wolfgang Schäuble has said that EU treaty change – requiring an Irish referendum – is neither achievable nor necessary to implement outstanding reforms of the euro zone, suggesting that a compromise solution on banking resolution could be possible. "I don't think that it will be possible to achieve a major treaty change in all of Europe," said Mr Schäuble to the Handelsblatt business daily. Instead, he suggested, some euro reforms, in particular plans for a new currency commissioner, could be bedded down in protocol 14 of the Lisbon Treaty.

Currency commissioner
"One could create the same kind of strong role for a currency commissioner for the oversight of the stability and growth pact as the competition commissioner has today. That [commissioner] can outlaw subsidies, against which a state can then only take legal action. This should be introduced for budget law too."

With euro zone finance ministers due to meet on Monday to hammer out agreement on who should have the power to wind down troubled banks, there were signs that a compromise agreement was being mooted, with eurogroup head Jeroen Dijsselbloem suggesting that the decisions on a single resolution fund and on a resolution mechanism could be treated separately.

Another option under consideration would allow countries a veto on a wind-down decision in certain cases.

Mr Schäuble said he was optimistic that European finance ministers would reach agreement over the outstanding differences on resolution of failing European banks.

“Perhaps we will need another all-night session but we want agreement by year-end. We will find a solution.”