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ECB Acknowledges Downside Risk, Forecasts Above-Target Inflation

ECB Acknowledges Downside Risk, Forecasts Above-Target Inflation

Benjamin Spier, Technical Strategist

THE TAKEAWAY: ECB acknowledges downside risk and higher than targeted inflation -> Merkel looks to G20 summit to call for debt-cutting -> Euro trading slightly higher

The European Central Bank said it sees increased downside risk in its economic outlook, according to the bank’s monthly bulletin. The ECB also forecasted that inflation will stay above its target 2% rate this year before falling back under 2% in 2013.

The bulletin’s editorial noted economic uncertainty in the short term, saying that high unemployment and balance sheet adjustment could dampen underlying growth momentum. The ECB decided to keep interest rates unchanged following its last meeting, but the downside risk might lead to a future rate cut.

The bank projected a 0.3% to 0.5% GDP growth for 2012, and says 2013 GDP could grow anywhere from 0% to 2%.

Earlier today, German Chancellor Angela Merkel said that cutting debt must be part of any action-plan created by the G20 summit meeting next week. Merkel told the German parliament that the summit will focus on the Euro area crisis and she firmly declared that Europe is Germany’s future and fate, but added that her country’s strength to deal with the current crisis is not limitless. Merkel also said that recovery will be slow and debt-fueled growth should be resisted.

Just yesterday, Moody’s cut Spain’s debt rating from A3 to Baa3 following the Spain aid plan. The rating did not significantly affect currency or bond markets, as the Euro took a small climb yesterday against the US Dollar and Spanish 10-year bond yields had already priced in the poorly received debt deal and reached new highs at 6.83%.

_ECB_Acknowldges_Downside_Risk_Forecasts_AboveTarget_Inflation_____body_eur.png, ECB Acknowledges Downside Risk, Forecasts Above-Target Inflation

EUR/USD did not react strongly to the ECB report and remains only slightly higher than today’s open.

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