The European Central Bank opened the door to interest-rate cuts if needed to bolster a weakening economic recovery - a dramatic U-turn from its decision to raise interest rates just two months ago.
Economic risks have "intensified" to the downside with "enormous" uncertainty, ECB President Jean-Claude Trichet said after the central bank held its main policy rate at 1.5 per cent. He called the ECB's reassessment of the economic outlook "significant," and highlighted weakening global growth, declines in equity markets and strains in eurozone government bond markets as trouble spots.
At the same time, Mr Trichet defended the ECB's two rate hikes earlier this year, saying they were needed to keep inflation in check. He also launched an uncharacteristically passionate defence of the ECB's recent decision to buy Italian and Spanish bonds, saying the moves were needed to restore smooth transmission of the ECB's interest-rate decisions to financial markets and the economy. "We stand ready to do whatever is necessary", Mr Trichet said, adding that the ECB will "monitor very closely all developments".
Eurozone GDP "is expected to increase very moderately in the second half of this year", Mr Trichet said. ECB staff cut their 2012 growth forecast to 1.3 per cent from 1.7 per cent. If the economy stabilises even at weak growth rates, then the ECB will likely keep interest rates steady.
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