The European Central Bank said on Thursday it expected a much sharper recession this year in the euro zone than earlier forecast, unveiling details of how it will pump cash into the economy while it kept interest rates on hold.
The bank's new staff forecasts predicted the euro zone economy would now shrink by up to 5.1 percent this year and signalled it would also struggle to grow in 2010 — forecasting a change in GDP of between -1 percent and +0.4 percent.
Inflation would not return to positive territory until the end of this year and was "firmly anchored", ECB President Jean-Claude Trichet said, detailing unchanged forecasts for price growth next year of between 0.6 and 1.4 percent.
The bank targets inflation at near but below 2 percent.
"After the extremely weak first quarter, activity over the remainder of this year is expected to decline at much less negative rates. After a stabilisation phase, positive quarterly rates are expected by mid 2010," Trichet said.
Earlier the bank kept its interest rates on hold at 1.0 percent and markets' attention was focused on the details of its plans to buy 60 billion euros in covered bonds and clues on whether rates would be cut further.
Trichet said the bank would spread the purchases across the euro zone, buying bonds rated at least AA or equivalent, in both primary and secondary markets. He said the purchases would be completed by the end of June next year.
Euro zone and British government bond futures hit a session low while euro interest rate futures extended falls after Trichet's initial statements.
ON HOLD
All but 2 of the 78 analysts polled by Reuters correctly forecast the ECB's decision to keep the main refi rate at a record low 1.0 percent at its monthly policy meeting.
Most analysts believe ECB rates have reached their lowest point and will stay there until at least the end of next year.
However, questions remain on the chances of their falling later. While some ECB policymakers have said they are unwilling to go below 1 percent, Trichet refused to confirm last month whether rates were at their lowest point, saying merely that they were appropriate.
One in four economists polled saw further easing by September.
Governing Council member Erkki Liikanen said last week that fixing a lower limit was not part of the ECB's policy.
The Bank of England also decided to keep UK rates on hold on Thursday at 0.5 percent.
COVERED BONDS
The 60 billion euro ($85 billion) covered bond purchase programme aims to help the euro zone economy out of recession by lowering long-term borrowing costs.
The euro zone's economy shrank 4.8 percent in the first quarter of the year from the same period a year earlier and the ECB had been more cautious than some of its peers about whether there are signs the economy might be about to recover.
On Wednesday, U.S. Federal Reserve Chairman Ben Bernanke said that while he expected the U.S. recession to end this year, getting government debt under control was vital to ensuring the country's long-term economic health.
