–Add Underlying Forecast Assumptions

FRANKFURT (MNI) – European Central Bank’s staff has left its
forecasts for Eurozone growth and inflation largely unchanged for this
year and next, though there were “increased downside risks” to growth,
ECB President Mario Draghi said Thursday.

Growth forecasts for this year were left unchanged despite an
acknowledgement that the Eurozone economy has shown signs of weakening
in the second quarter. The range for inflation was narrowed somewhat
amid easing oil prices that have dampened HICP inflation to its lowest
level in 15 months.

At his monthly press conference, Draghi said the staff still
projects GDP growth in a range of -0.5% to +0.3% in 2012, giving a
midpoint of -0.1%. That is unchanged from March, which had marked the
second straight sharp cut to growth forecasts.

Draghi said second quarter data “point to a weakening growth and
highlight prevailing uncertainty.” There are “increased downside risks,”
while balance sheet adjustments, sovereign debt tensions and high
unemployment “are expected to continue to dampen the underlying growth
momentum,” he said.

Still, Draghi said “beyond the short term, we continue to expect
the euro area economy to recover gradually.”

The growth forecast range for 2013 was tweaked down at the high end
to zero to +2.0% for a midpoint of 1.0%. The ECB in March had projected
next year’s growth at 1.1%.

Eurozone GDP was stable in the first quarter, but recent data
suggest the economy has fallen back into recession in recent months. The
Eurozone May PMI fell to its lowest level in three years at 45.1, with
even Germany’s manufacturing sector feeling the impact.

The staff revisions keep the ECB slightly more optimistic than
other recent growth forecasts.

The European Commission and International Monetary Fund project a
0.3% contraction this year, with a rebound in 2013 to 1.0% and 0.9%,
respectively. The OECD in its May forecast was closer to the ECB,
projecting a contraction of 0.1% this year and 0.9% growth next year.

On HICP inflation, Draghi said the ECB staff now projects a range
of +2.3% to +2.5% in 2012, marking a narrowing of the range from March
but leaving the midpoint unchanged at 2.4%.

Draghi said while inflation is likely to stay above 2% this year,
“underlying price pressures should remain subdued” and inflation should
fall back below 2% in 2013.

Draghi said “price developments should remain in line with price
stability over the medium term” and added that “inflation expectations
for the euro area economy continue to remain well anchored.”

Risks to the inflation outlook are “broadly balanced”, with upside
risk stemming from indirect taxes, fiscal consolidation and possible
commodity price increases, while downside risks stem from possible
weaker than expected growth, he said.

Harmonized consumer prices for next year were seen in a +1.0% to
+2.2% range, marking a narrowed range but keeping the midpoint at 1.6%.

EMU HICP fell to a 15-month low of 2.4% in May. Preliminary
estimates of German inflation in EU harmonized terms also showed
consumer prices at a 14-month low of 2.1%, with the national CPI at
1.9%, below 2% for the first time since 2010.

The OECD sees Eurozone inflation at 2.4% this year and falling to
1.9% next year, broadly in line with the ECB’s most recent Survey of
Professional Forecasters. The IMF’s April forecast put inflation at 2.0%
in 2012 and 1.6% in 2013.

The ECB’s forecasts assumed 10-year government bond yields
averaging 4.2% in 2012, 4.5% in 2013; short-term interest rates of 0.8%
in 2012 and 0.7% in 2013; and the average effective euro rate down 4.4%
in 2012 and down 0.3% in 2013.

Other underlying assumptions are a euro-dollar exchange rate of
$1.30 in 2012 and 2013, commodity prices dropping 8.0% in 2012 and 1.6%
in 2013, and Brent crude oil averaging $114.60 in 2012 and $107.90 in
2013.

The following table contains the ECB’s new forecasts, compared with
the ones issued in March.

June Projections March Projections
Range Midpoint Range Midpoint

2012 GDP -0.5% to +0.3% -0.1% -0.5% to +0.3% -0.1%
2013 GDP 0.0% to +2.0% +1.0% 0.0% to +2.2% +1.1%
2012 HICP +2.3% to +2.5% +2.4% +2.1% to +2.7% +2.4%
2013 HICP +1.0% to +2.2% +1.6% +0.9% to +2.3% +1.6%

–Frankfurt Newsroom, +49-69-720-142; ccermak@marketnews.com

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