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ECB, playing down fresh crisis fears, keeps rates on hold

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(GlobalPost/GlobalPost)

The European Central Bank Thursday held its main refinancing rate at a historic low of 0.75 percent, playing down concerns that political gridlock in Italy could trigger a resurgence in the debt crisis.

The ECB's policy-setting governing council discussed a possible cut in interest rates at its regular monthly meeting, but the consensus was to hold them steady, ECB chief Mario Draghi told a news conference that followed the decision.

"Yes, we discussed the possibility of doing it. But the prevailing consensus was to leave rates unchanged," Draghi said.

With inflation in the 17-country eurozone currently expected to remain in line with the ECB's goal of close to, but just under, 2.0 percent, "this will allow our monetary policy stance to remain accommodative," Draghi said.

And the central bank's policy stance "will remain accommodative as long as needed," he insisted, apparently hinting the ECB could cut rates further if required.

Draghi downplayed concerns that the political deadlock in Italy could destabilise the single currency area as a whole and reawaken the sovereign crisis which appears to have abated in recent months.

"If we look at contagion, you've seen that the contagion to other countries has been muted this time, contrary to what might have happened about a year and a half ago," Draghi said.

He added: "As you see, markets, after some excitement immediately after the elections, have now reverted back more or less to what they were before."

The Italian-born central banker noted that financial markets were in more confident mood than before and had recognised that elections were extremely frequent in the 17-country eurozone.

"All in all, right now, markets were less impressed than politicians and you," he quipped, referring to the assembled media.

He also shrugged off concerns that reforms in Italy could stall given the uncertain political situation.

"You have to consider that much of the fiscal adjustment that Italy went through will continue going on on automatic pilot," said Draghi.

Looking at the euro area as a whole, Draghi said the region appeared to be on the mend, albeit slowly.

The fragmentation of the financial markets was "not worsening, it's actually improving, it's receding," he said.

And "later in 2013 economic activity should gradually recover, supported by a strengthening of global demand and our accommodative monetary policy stance," he predicted.

But he insisted it was "essential for governments to continue implementing structural reforms, to build further on the progress made in fiscal consolidation, and to proceed with financial sector restructuring."

The ECB chief unveiled the bank's latest updated staff projections for growth and inflation for the single currency area, which now see the eurozone economy contracting by 0.5 percent in 2013 before recovering to grow by 1.0 percent next year.

The previous forecasts in December had pencilled in a contraction of 0.3 percent this year and growth of 1.2 percent in 2014.

The bank also slightly pared its inflation forecasts for 2014, leaving its estimate for this year unchanged at 1.6 percent.

It said it expected average inflation of 1.3 percent in 2014, compared with the level of 1.4 percent projected in December.

ECB watchers said Draghi was clearly wanting to keep all options open with regard to a further reduction in interest rates, even if such a move was unlikely.

"Barring a change in the economic outlook there now seems less likelihood of a cut in the near term," said Tom Rogers from Ernst & Young Eurozone Forecast.

Commerzbank chief economist Joerg Kraemer also said he believed rates would not fall any further.

ING Belgium economist Carsten Brzeski said "rates should remain on hold unless the economic recovery fails to materialise in the coming months. It looks as if it would need at least one or two months of disappointing hard data before the ECB would change its view."

Berenberg Bank economist Christian Schulz said that if the economy improves as expected, a rate cut "remains unlikely."

"A rate cut or other measures seem to remain a measure of last resort. ECB inaction keeps the pressure on governments to continue structural reforms to improve growth prospects," Schulz said.

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http://www.globalpost.com/dispatch/news/afp/130307/ecb-playing-down-fresh-crisis-fears-keeps-rates-hold-0