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Central bank for euro currency union keeps rates on hold despite weak recovery

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(Globalpost/GlobalPost)

FRANKFURT - The European Central Bank kept its key interest rate unchanged on Thursday even though the recovery has weakened in the 17-country euro currency union.

ECB President Mario Draghi said the bank was "ready and able" to take new steps to help the economy if that's needed." But none were announced.

The bank left its benchmark rate at 0.25 per cent at its meeting at its headquarters in Frankfurt, Germany, following a surprise quarter-point cut last month.

The refinancing rate determines what private-sector banks pay to borrow from the ECB and, through them, influences borrowing costs paid by businesses and consumers. In theory, a cut in the ECB rate means lower market rates that allow businesses to borrow more easily — so they can invest in new production and create jobs.

But some banks are unwilling to lend at those low rates. They're worried about the economy and focused on fixing their own finances. That blunts the effect of the ECB's low-rate policy.

Draghi said the bank had studied "a full array of instruments" that go beyond lower benchmark interest rates. "We are ready and able to act... Our level of preparedness is pretty high on all of them," he said.

But he left it open what the bank might do: "We have not identified any specific instrument in today's discussion."

Other ways to stimulate the economy could include giving cheap, long term loans to banks, at the condition that the money is used for loans to businesses instead of hoarded in investments such as government bonds. The ECB could also push the deposit rate it pays banks from zero into negative territory. That would in theory give banks an incentive to pull the money out of the central bank's super-safe deposit facility and lend it.

Draghi said there had been a "brief discussion" of a negative deposit rate at Thursday's meeting.

ECB officials have said they could, in theory, also start large-scale bond purchases with newly-created money, as the U.S. Federal Reserve has done. That could drive down longer-term interest rates. But the economy would have to be so slack that it is threatened with deflation, a chronic fall in prices that kills off consumer spending and business investment.

The ECB is the top monetary authority for the 17 European Union members and their 331 million citizens who use the euro. It is the legal issuer of the currency and uses interest rates and other policy tools to keep inflation within stable limits — up or down.

The eurozone economy expanded only 0.1 per cent in the third quarter and unemployment is 12.1 per cent. Low inflation of only 0.9 per cent is a worrisome sign of weakness and remains well below the bank's goal of just under 2 per cent.

The ECB on Thursday cut its forecast for inflation next year, to 1.1 per cent from 1.3 previously. It expects that rate to rise to only 1.3 per cent in 2015.

The ECB nudged up its growth forecast for next year, to 1.1 per cent from 1.0 per cent previously, after an expected contraction of 0.4 per cent this year.

http://www.globalpost.com/dispatch/news/the-canadian-press/131205/central-bank-euro-currency-union-keeps-borrowing-benchmark-u