The European Central Bank (ECB) reiterated that its accommodative monetary policy is justified by currently contained inflation as it continues to see downside risks for the Eurozone economy with a gradual recovery only beginning in the second half of this year.

The ECB's "Monthly Bulletin" reflected words spoken by its President Mario Draghi last week when he indicated that inflation expectations remain "firmly anchored" and in line with its 2.0% inflation target for the medium term.

"Overall, this allows the monetary policy stance to remain accommodative," according to the report.

The ECB also repeated that recent data suggests that economic activity in the Eurozone is starting to stabilise in the first part of 2013 but only a "gradual recovery should commence in the second part" based on an expected strengthening of both global and domestic demand.

Nevertheless, the monetary authority continues to see downside risks to the economic outlook and warned of the "possibility of weaker than expected domestic demand and exports and slow or insufficient implementation of structural reforms in the euro area". The ECB explained that these factors have the potential to dampen the improvement in confidence "and thereby delay the recovery".

Furthermore, the ECB applauded the current liquidity situation of banks, noting that they have already returned €224.8bn of the €1,018.7bn loaned out through the two three-year long-term refinancing operations, known as LTROs. "These repayments reflect improvements in financial market confidence over the last few months and receding financial market fragmentation," the central bank said, adding that these improvements along with a continued implementation of structural reforms "should work their way through to the economy".

In the report's conclusion, the ECB highlighted the need for governments to address current high levels of long-term and youth unemployment. "To this end, further product and labour market reforms are needed to create new job opportunities by supporting a dynamic, flexible and competitive economic environment," the ECB concluded.

JM

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