ECB cuts 2007 euro zone growth forecast due to financial markets crisis

Sep 6, 2007 - The European Central Bank has cut its forecast for 2007 euro zone growth in the wake of the recent credit crunch in financial markets.

The ECB cut its forecast for 2007 GDP growth to 2.5 pct from 2.6 pct but held on to its projection for 2008 growth at 2.3 pct.

The ECB also kept its 2.0 pct inflation forecast for this year and next year.

The forecasts are the mid-point of ranges given by ECB president Jean-Claude Trichet at today's ECB news conference.

They are compiled by ECB staff and provide one input to the ECB governing council's assessment of price developments and risks to price stability, but they do not play a dominant role in the council's monetary policy decisions, the central bank says.

The ECB publishes its forecasts every three months. The previous forecasts were given on June 6.

The full ranges given by Trichet for the growth forecasts were 2.2-2.8 pct in 2007 and 1.8-2.8 pct in 2008. The ranges for the inflation forecasts were 1.9-2.1 pct in 2007 and 1.5-2.5 pct in 2008.

The forecasts are based on market expectations for interest rates and commodity prices.

The ECB said the forecasts therefore assume that three-month euribor interest rates will average 4.3 pct in 2007 and 4.5 pct in 2008, and that 10-year government bond yields will remain flat at their mid-August level of 4.5 pct.

Oil prices are assumed to average 68.1 usd per barrel on average this year and 71.9 usd in 2008.

The oil price assumptions reflect futures market prices and represent an upward revision from the ECB's June forecasts when it was assuming that oil prices would average 65.00 usd in 2007 and 69.90 usd in 2008.

Non-energy commodity prices are expected to increase 20.0 pct this year and 5.7 pct in 2008.

The forecasts also see the euro remaining at 1.37 usd over the next two years and that its trade-weighted index will be 3.1 pct higher this year than the 2006 average and 0.5 pct higher in 2008 compared to this year's average.