9 Dec 2011

Europe's central bank revises growth forecast

1:07 pm on 9 December 2011

The European Central Bank has cut its forecast for growth in the eurozone and now predicts economic activity in the region will shrink by as much as 0.4% next year.

The bank cited the revised forecast as the main reason it cut its key interest rate by a quarter of a percentage point, to 1% on Thursday.

ECB President Mario Draghi has unveiled new support measures for eurozone banks but played down the prospect of any new financial support for governments.

There had been speculation that the ECB may be preparing to bail out Italy if eurozone governments agree on tough new limits on their borrowing and economic reforms.

However, Deutsche Bank chief economist Thomas Mayer says it would be extremely risky for the ECB to buy Italian and Spanish debt and effectively become a lender of last resort.

The ECB's moves come ahead of a critical Brussels summit of European Union heads to hammer out a deal on how to tackle the eurozone debt crisis, including a potential new treaty.

The two-day EU summit is expected to agree to tough new rules and automatic fines to ensure eurozone governments cut their borrowing to below 3% of their GDP.