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ECB holds fire on rates but keeps on high alert

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(GlobalPost/GlobalPost)

The European Central Bank as expected held its interest rates unchanged at its policy meeting Thursday, a month after taking unprecedented measures to ward off deflation in the euro area.

But ECB chief Mario Draghi insisted the central bank remained on high alert and would take further action again if necessary.

As widely predicted, the ECB's decision-making governing council decided to hold the bank's main refi refinancing rate steady at 0.15 percent.

ECB-watchers had not been flagging any new policy moves this month after the central bank unveiled a package of extraordinary measures in June in its battle to prevent the single currency area from slipping into deflation, a dangerous downward spiral of falling prices.

At that meeting, the ECB entered uncharted waters, taking one of its key interest rates into negative territory for the first time.

This means that banks will be charged for parking funds at the ECB to encourage them to lend to businesses and consumers instead.

Draghi also unveiled plans to pump more liquidity into the financial system later this year using the Targeted Long-Term Refinancing Operation (TLTRO).

The TLTRO measures are different to the steps the ECB took at the end of 2011 and the beginning of 2012 to boost liquidity.

At that time, banks were deemed to not be lending enough to the small- and medium-sized companies that form the backbone of the eurozone economy.

This time, the ECB is instead targeting loans to encourage banks to lend to households and non-financial corporations.

- Further moves 'if necessary' -

"The combination of monetary policy measures decided last month has already led to a further easing of the monetary policy stance," Draghi told his regular post-meeting news conference.

"As our measures work their way through to the economy, they will contribute to a return of inflation rates to levels closer to 2.0 percent," which is the ECB's definition of price stability, Draghi explained.

Area-wide inflation stood at 0.5 percent in June and May -- the lowest level since the financial crisis of 2008-2009, which tipped many countries in the bloc into recession.

Draghi pledged that interest rates "will remain at present levels for an extended period of time" and the governing council was "unanimous in its commitment to also using unconventional instruments within its mandate, should it become necessary".

The ECB also said it plans to switch its cycle of policy-setting meetings from four weeks to six weeks starting from January, when it would also begin publishing the minutes or records of those meetings in a bid to become more transparent in its decision-making.

So far, the ECB has always held rate-setting meetings on the first Thursday of every month.

But the complexity of the situation in the eurozone since the outbreak of the financial and debt crisis and the enlargement of the single currency area is forcing the ECB to adapt, Draghi explained.

- On 'high alert' -

"After last month's monetary policy fireworks, the ECB took it easy today," said ING DiBa economist Carsten Brzeski.

Nevertheless, "the ECB will remain in this state of high alert for a long while," the expert said.

Berenberg Bank economist Christian Schulz believed the ECB "is unlikely to take any further steps in the near term, except if the recovery weakens significantly or reverses".

Meetings are likely to have been moved to every six weeks in order to give enough time to agree minutes for publication, he added.

From January, the eurozone will comprise 19 members with the arrival of Lithuania. From then on, a new system of rotating votes will come into effect on the ECB governing council.

IHS Global Insight economist Howard Archer said "it will clearly take time for the ECB's June measures to fully kick in and take effect."

But Draghi's comments "kept the door wide open to eventual further action," he said.

"The ECB is now most likely to sit tight for the rest of 2014, and it is very possible that its work is now largely done.

But the bank "will certainly want to keep the markets thinking that more action remains on the cards so as to exert downward pressure on the euro and on market interest rates," he concluded.

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http://www.globalpost.com/dispatch/news/afp/140703/ecb-holds-fire-rates-keeps-high-alert