Next Gen News

• European Central Bank reverses decision not to buy debt
• Bank of England and eurozone keep interest rates unchanged
• Greece says it has reduced its deficit faster than expected

Jean-Claude Trichet said today that the European Central Bank (ECB) had been forced into its abrupt U-turn on buying government debt by fears of a second global financial seizure as he warned that Europe faced a long and bumpy road to economic recovery.

The president of the ECB said the decision to buy bonds less than 24 hours after the central bank ruled out such a move had been caused by a sudden deterioration in market conditions. It was, Trichet said, a "major event that was threatening the functioning not only of the European economy and market, but also of global finance and the global economy."

Speaking after the ECB left its key interest rate unchanged at 1%, the ECB president said the crisis in the eurozone would dampen growth prospects in 2011. "We expect the euro-area economy to grow at a moderate pace in an environment of continued tensions in some financial market segments and of unusually high uncertainty," he said.

The ECB now expects growth of between 0.2% and 2% in 2011 following expansion of 0.7% to 1.3% this year. "Compared with March 2010, ECB staff macro-economic projections, the range for real GDP growth this year has been revised slightly upwards owing to the positive impact of stronger activity worldwide in the short run, while the range has been revised somewhat downwards for 2011, reflecting mainly domestic demand prospects," Trichet said.

In the UK, the Bank of England also left interest rates on hold at 0.5% for the 14th successive month and made no changes to its £200bn quantitative easing programme. Analysts said borrowing costs were likely to remain on hold in both the 16-nation eurozone and Britain.

Marie Dixon, eurozone economist at Ernst & Young, said: "The ECB's decision not to change interest rates is no surprise. The central bank is facing difficult months ahead, where it will have to steer policy through financial turmoil, very weak growth in the eurozone and deflation in some countries. We think that the first rate increase will not come before the middle of next year.

"We have revised our forecast for eurozone growth down to 0.8% this year and 1.3% next year. This entails zero or negative growth in a number of countries that are heading for a 'lost decade' à la Japan in the 1980s and 1990s. Risks to this forecast are on the downside, which implies that the ECB's interest rates could stay at 1% for longer," she said.

Trichet said there were both upside and downside risks to growth. There was a chance that eurozone exports might be helped by a stronger than expected global pick-up, but there was also a risk of further financial tension and weaker confidence.

Roger Bootle, economic adviser to Deloitte, said the prospect of tax rises in George Osborne's budget on 22 June would depress activity and force the Bank's monetary policy committee to keep monetary policy loose. "A number of tax rises look likely this month, including the widely anticipated increases in capital gains and VAT. And to plug the black hole in the public finances, these may have to be followed up â€" if not in this budget, then in subsequent ones â€" by a wider rise in income taxes," Bootle said.

"Given all this, raising interest rates now would be a catastrophic mistake. In fact, if I were on the MPC, I'd be voting to do more to support the economy. Indeed, I think that many members will be voting this way before the end of the year. I continue to expect the Bank's policy of quantitative easing to be extended further â€" and for interest rates to remain at rock-bottom levels for a long time yet."

Greece beats target in cutting deficit

Greece said it had reduced its deficit faster than expected in the first five months of the year, as a lower than expected increase in revenues was offset by higher spending cuts. The embattled nation, which has been at the centre of the eurozone crisis, said its January-May deficit was €8.97bn (£7.4bn), compared with €14.65bn in the first five months of 2009. This represented a 38.8% reduction, more than the planned 35.1% cut.

There was also an improvement in unemployment, which reached 11.6% in March â€" down from 12.1% in February, with 26,500 fewer jobless people. However, the outlook is less favourable with the country's austerity policies expected to deepen the economy's downturn and force the jobless figure higher. Debt-ridden Greece narrowly avoided defaulting on its loans last month, using part of a €110bn international rescue package. AP Athens