FRANKFURT - European Central Bank President Mario Draghi held the door open for another interest rate cut if the struggling euro area economy needs it to get out of recession.
The ECB on Thursday held off for now on offering more stimulus, leaving its benchmark interest rate unchanged at 0.5 per cent.
But Draghi refused to rule out further cuts, telling reporters at his post-decision news conference that "we haven't reached the zero bound" for rates and repeated that they will "stay where they are or go lower."
The ECB head added that its stance was "valid for an extended period of time." That underlined the long-term message Draghi introduced at last month's meeting, which was seen as a significant shift in the way the bank communicates.
Draghi has sought to make it clear the ECB is nowhere near a decision to withdraw any stimulus, unlike the U.S. Federal Reserve, which has started discussing when it might halt its bond-buying program aimed at promoting growth. The Fed statements that stimulus might end made some market interest rates, such as those on European government bonds, rise temporarily — something the ECB wants to prevent.
And while the U.S. is recovering, the 17 countries that share the euro as their currency are still waiting for a return to growth. The eurozone shrank 0.2 per cent in the first quarter, the sixth straight quarter of declining output.
Draghi repeated his forecast that the bank foresees a modest recovery later this year and next year. Recent indicators such as purchasing managers' surveys have indicated strengthening activity. Some economists expect the eurozone could either show flat or slight growth for the April-June period or in the July-September quarter when gross domestic product figures are released on Aug.14.
That alone could remove the need for another cut. But analyst Reinhard Cluse at UBS said the ECB would be quick to cut if things don't go according to plan.
"Should sentiment and activity data fail to improve, the ECB is unlikely to hesitate to cut rates again," he wrote in a note to investors.
In its attempts to revive the eurozone economy, ECB has already cut rates, made cheap long-term loans to banks, and extended unlimited helpings of credit at its regular short-term loan offerings to banks of one week, a month and three months. This time last year, it unveiled plans to buy unlimited amounts of bonds in countries struggling with high borrowing costs, provided they committed themselves to strict spending limits.
The ECB president made it clear the bank's work had not ended with last year's bond purchase offer, which has won much credit for calming the eurozone crisis. He said that despite the belief among some that that the bond-purchase program "is the response for all the problems of the world," the bank was still "not satisfied at all" with financing conditions in the eurozone. He said it would keep seeking ways to make sure low rates get through to the economy.
"We have a lot more to do on that front," he said.
A further rate cut from the ECB could, in theory, stimulate growth by making credit cheaper for businesses to borrow and expand. The problem is that the ECB's already lends to banks at the record low benchmark rate. But those rates are not being passed on to businesses in the most troubled countries, such as Spain and Italy. Businesses there can pay several percentage points more for a loan than companies in Germany.
Instead, Draghi chose to reinforce his efforts to give clarity about what the bank plans well into the future. The technique, called "forward guidance" in market jargon, is an attempt to keep markets from misreading or overreacting to the bank's message. It has been used by the Fed, which has said that rate will stay low at least until employment falls to 6.5 per cent. Previously the ECB said it would "never precommit" on rates.
Draghi repeated that rates will stay down as long as the bank sees no threat of inflation above its goal of just under 2 per cent, and as long as the growth in credit and the amount of money in the economy remain weak.
He added that the bank would not necessarily repeat its guidance every month, so that markets don't think each statement is good for one month only.
And he backed away from his earlier mention of publishing minutes of ECB discussions as a way of further guiding markets, as the Fed, Bank of England and Bank of Japan do. He said the bank was still looking for a "richer way" to communicate its deliberations but that it wanted to avoid any method that put pressure on individual governing council members.