ECB cuts Europe's growth, inflation forecast

The European Central Bank cut its inflation and growth forecasts on Thursday and suggested its stimulus program could be extended for a longer period.

But the ECB kept its main interest rate on hold at 0.05 per cent. That is a significant decision when the U.S. may raise rates in the near future.

The downbeat forecast for the European economy knocked back the euro, which fell by one cent against the U.S. dollar to $1.1127.

But European stocks rose on the suggestion the eurozone's bond-buying program, due to end in September 2016, might be continued.

The ECB is pumping 60 billion euros ($89 billion Cdn) a month in newly printed money into the economy through purchases of government and selected corporate bonds.

ECB president Mario Draghi said the ECB can adjust the "size, composition and duration" of the program if needed and indicated it would continue until inflation turns up convincingly toward the bank's goal of just under two per cent.

"Lower commodity prices, a stronger euro, somewhat lower growth, have increased the risk to a sustainable path of inflation towards 2 per cent," he told a news conference in Frankfurt.

Inflation very low

The bank trimmed its outlook for annual price increases this year to 0.1 per cent from 0.3 per cent previously, and for next year to 1.1 per cent from 1.5 per cent.

Low oil prices are helping to keep inflation low in Europe it is currently running at just 0.2 per cent.

The ECB also downgraded its economic growth forecast, to 1.4 per cent in 2015, down from the earlier prediction of 1.5 per cent, and 1.7 per cent in 2016, compared with 1.9 per cent.

Thedownsiderisks to growth include lower external demand due to weaker growth in emerging markets, according to BMO Capital Markets economist Jennifer Lee.

"Draghi stressed that it was premature to conclude whether or not they will have a lasting impact or if they are transitory," she said in a note to clients.

There are signs of recovery in European economies this year, including lower unemployment and stronger retail sales.

Financial information company Markit reported Thursday that its purchasing managers' index a gauge of economic activity rose to a four-year high of 54.3 points in August from 53.9 the previous month. Anything above 50 indicates expansion.

Chris Williamson, Markit's chief economist, said the calming of so-called Grexit fears "has led to an improvement in the business environment across the eurozone."