European Central Bank President Mario Draghi said policy makersdiscussed cutting interest rates to a record low today, fuelingexpectations they will act as soon as next month as the worseningdebt crisis curbs economic growth.

“We monitor all developments closely and we stand ready to act,”Draghi told reporters in Frankfurt after the ECB left its benchmarkrate at 1 percent. Downside risks to the economic outlook haveincreased and “a few” of the ECB's Governing Council members calledfor rate cut at today's meeting, he said.

The ECB is under pressure to lower rates and introduce moreliquidity support for banks as governments struggle to fix a crisisthat's engulfing Spain and could force Greece out of the euro.While the ECB extended into next year its policy of lending banksas much money as they want for periods of up to three months,Draghi indicated another round of three-year loans is not imminent,keeping the pressure on governments to step up their response tothe crisis.

“I don't think it would be right for the ECB to fill otherinstitutions' lack of action,” he said.

The euro fell as Draghi spoke before recouping its losses totrade at $1.2513 at 5:25 p.m. in Frankfurt, up 0.5 percent today.The yield on Spain's 10-year government bond climbed as much as 6basis points before slipping back to 6.38 percent.

“Draghi left the door wide open for a rate cut,” said TobiasBlattner, an economist at Daiwa Capital Markets Europe in London.“But policy makers wanted to keep their powder dry until after theGreek elections and the independent assessment of the Spanishbanking sector.”

Greece will hold fresh elections on June 17 that could hand morepower to parties opposed to the terms of the nation's rescuepackage and precipitate its exit from the monetary union. SpanishEconomy Minister Luis de Guindos said today that reports on banks'loan books by two international consultants will be ready in 10 to15 days.

The Group of Seven nations yesterday agreed to coordinate theirresponse to Europe's turmoil, which has tipped at least eight ofthe 17 euro-area economies into recession and is threatening theglobal economy.

New Forecasts

The ECB today forecast a 0.1 percent economic contraction in theeuro area this year, unchanged from a March estimate, while itlowered its prediction for 2013 growth to 1 percent from 1.1percent. Inflation forecasts were unchanged at 2.4 percent for 2012and 1.6 percent for 2013.

Draghi said the projections were finalized before a spate of“soft” economic data. German industrial output fell more thaneconomists forecast in April and Spanish production had the biggestdrop in more than two years, two reports showed today.

Euro-area unemployment has reached 11 percent, the highest levelon record, and purchasing manager indexes show manufacturing andservice industries are contracting at a faster pace than they werewhen the ECB last cut rates in December.

International Monetary Fund Managing Director Christine Lagardesaid in an interview with Sweden's Svenska Dagbladet published June4 that it's “clear” the ECB has room for another rate cut.

At the same time, Draghi said stresses in financial markets are“far away” from the levels reached after the collapse of LehmanBrothers Holdings Inc. in 2008.

“We still look for a 25 basis point ECB rate cut in July,”Holger Schmieding, chief economist at Berenberg Bank in London,said in an e-mail. However, “the ECB offered no hint today that itmay re-activate its two most important non-standard measures, thatis the three-year long-term refinancing operations and thepurchases of sovereign bonds,” he said.

Spain, which has resisted pressure to become the fourtheuro-area nation to seek a bailout, yesterday called for the firsttime for European funds to shore up its banks as it struggles torecapitalize them.

The spread between Spanish and German 10-year bond yieldswidened to a record 5.4 percentage points last week and the cost ofinsuring against default on Spanish sovereign debt rose to ahistoric high.

With his comments today, Draghi is “delineating the role of theECB from that of governments, as he seeks to get leaders to agreeon a road map” to shore up the euro, said Julian Callow, chiefEuropean economist at Barclays Plc in London.

European leaders are due to hold a summit in Brussels on June28-29.

The Reserve Bank of Australia cited Europe's crisis when cuttingits benchmark rate yesterday by a quarter point to 3.5 percent,while the Bank of Canada held its key rate at 1 percent. The Bankof England will announce its latest policy decision tomorrow amidspeculation it could increase asset purchases after the U.K.slipped back into recession.

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.