The European Central Bank slashed its eurozone economic outlook for next year, forecasting further contraction at a time of record unemployment, but decided to keep interest rates on hold as it saw no threat from inflation.

Mario Draghi, ECB president, said a “gradual recovery should start later in 2013”. Speaking after a meeting of the interest rate-setting governing council, he said the “prevailing consensus” was to keep the main refinancing rate at 0.75 per cent.

The bank’s quarterly forecasts are expressed in ranges and its latest revision represented a sharp correction from September’s projection. The midpoint of the new ranges shows eurozone GDP contracting 0.3 per cent in 2013, against a previous forecast that predicted growth of 0.5 per cent.