ECB says eurozone recession will deepen this year

Phillip Inman, economics correspondent

The European Central Bank has predicted a deeper than expected slump in the eurozone economy as its president, Mario Draghi, said the institution had discussed negative interest rates in a bid to kickstart growth.

The ECB said the economy of the euro's 17 members will shrink by 0.6% this year compared with the previous forecast of a 0.5% decline. However, the bank was more optimistic about 2014, inching up its growth forecast from 1% to 1.1%.

Draghi also reiterated that ECB is considering unconventional policies, such as charging banks interest on deposits, in order to force them to offload money and lend to small companies.

Speaking after the latest governing council meeting, he said the ECB is "reflecting on issuing forward guidance" on its monetary policy, which was adopted last year by Ben Bernanke, the US Federal reserve head. He added: "We see no reason to act on all these fronts. These are all measures we keep on the shelf."

Asked if the decision to keep interest rates on hold at 0.5% was unanimous, Draghi said there was a consensus that "there wasn't any direction change that would grant immediate action". In the past, he has used the term consensus to signal a large majority rather than unanimity.

"This can be seen as a reaction to the slight improvement in the purchasing managers indices, which seem to signal that the worst is over in the eurozone," said David Kohl, chief economist for Germany at the Swiss bank Julius Baer.

Amid criticism of his record over the last year, when much of the eurozone has fallen into recession, Draghi blamed individual governments for their failure to sweep away labour rules that restrict hiring and the adoption of new working practices.

Next week the ECB will come under intense scrutiny following an appeal to the German constitutional court against its most recent rescue package.

Last year Draghi announced that countries, fearing they might go bust, could access funds via a new policy known as Outright Monetary Transactions (OMT). He said legal documentation supporting then policy would be released, possibly next week.

The OMT is credited with calming international money markets after the near collapse of the eurozone last summer. Draghi famously said he would do "whatever it takes" to keep the currency club together prior to its launch.

Critics of the OMT policy in Germany say that it acts as a collective euro-wide subsidy that undermines German sovereignty, though no country has yet tapped its funds.guardian