The European Central Bank (ECB) today cut its growth forecasts for the euro zone and projected inflation would fall rapidly next year to well below its target level.
The ECB slashed its projections for euro zone economic growth to 0.4-1.0 per cent this year and 1.1-2.1 per cent in 2004.
The growth figures were revised down from December's forecasts of 1.1-2.1 per cent in 2003 and 1.9-2.9 per cent in 2004.
The sharply lower economic forecasts shed more light on why the ECB lopped half a percentage point off interest rates last week, taking its benchmark rate to a record low of 2 per cent, and presented evidence for possible further cuts.
"The major change to the projection assumptions compared with . . . December 2002 is the higher nominal effective exchange rate of the euro, reflecting the appreciation of the euro by some 11 per cent since November 2002," the ECB said in its June monthly bulletin.
The bulletin largely repeated the central bank's key messages from the June 5th news conference - namely that inflation is falling significantly, growth remains weak and the economic risks are to the downside.
In 2004, however, inflation is seen retreating to between 0.7 per cent and 1.9 per cent, compared with a range of 1.0 per cent and 2.2 per cent that was previously forecast.
The ECB repeated its assertion that it saw no indication of deflation, or falling prices, on the euro zone's economic horizon.