ECB Lowers Rates

The European Central Bank lowered its forecast for euro zone inflation, expecting it to reach 1.4% in 2016, further away from its target of below but close to 2%. The new medium-term ECB staff projections are lower than those published in March, when ECB staff had forecast 1.5% for 2016.

The bank said its staff expected inflation to average 1.5% in the final quarter of 2016, down from its March projection of 1.7% in that quarter. The ECB cut interest rates to record lows on Thursday, imposing negative rates on its overnight depositors to cajole banks into lending more and to fight off the risk of Japan-like deflation.

ECB staff also revised down their projections for 2014 inflation to a midpoint of 0.7% from the previous 1.0%. They saw 2015 inflation at 1.1%, lower than their earlier estimate of 1.3%.

In terms of growth, the forecasts saw the euro zone economy growing by 1.8% in 2016 after 1.7 percent in 2015 and 1.0% this year. That marked a slight downward revision to its previous 2014 forecast but an upward revision to its 2015 projection.

European Central Bank President Mario Draghi said the bank would not hesitate to take further action to support the euro zone economy, which is sluggish and suffering from very low inflation.

"If required, we will act swiftly with further monetary policy easing. The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate should it become necessary to further address risks of too prolonged a period of low inflation," Draghi told a news conference. He added that "for all practical purposes" interest rates had reached the bottom.

The ECB earlier cut its main interest rate to 0.15% and imposed negative interest rates on banks' overnight deposit. Draghi said it has come to its decision after studying its staff's latest economic forecasts.