Thursday, October 4, 2012

ECB says it keeps rates on hold as inflation remains stable

    The European Central Bank (ECB) held its key interest rate unchanged as inflation is expected to remain broadly stable in the medium term despite downside risks to the euro area's economic outlook.
    ECB President Mario Draghi also told a news conference in Brdo pro Kranju, Slovenia, that inflation rates are expected to remain above 2 percent through this year and then fall below that level during 2013 and remain in line with the bank's target of inflation that is close to, but below 2 percent.
    Speaking a month after the ECB unveiled its long-awaited plan to purchase an unlimited amount of bonds from euro area nations if necessary, Draghi took aim at continued criticism of his plan, especially in Germany, saying the central bank was ready to proceed as long as all conditions had been met.

    "Let me repeat again what I have said in past months: we are strictly within our mandate to maintain price stability over the medium term; we act independently in determining monetary policy; and the euro is irreversible," Draghi said, adding:

    "The Governing Council was firmly committed to preserving the singleness of its monetary policy and to ensuring the proper transmission of the policy stance to the real economy throughout the euro area."
    The ECB held its refinancing rate steady at 0.75 percent after cutting it by 25 basis points in July.

    He said the ECB's decision to undertake unlimited purchases of sovereign bonds if needed, under the Outright Monetary Transactions (OMTs) program, had helped alleviate tensions in financial markets.
    Draghi added that it was essential for governments to continue to reduce fiscal and structural imbalances and proceed with the restructuring of the euro area's financial sector.
    Economic growth in the euro area is expected to remain weak in the near term and only recover gradually thereafter as activity is dampened by the reduction in budget deficits in both the financial and non-financial sector, high unemployment and an uneven global recovery, Draghi said.
    "The risks surrounding the economic outlook for the euro area continue to be on the downside," Draghi said, adding: "They relate, in particular, to ongoing tensions in several euro area financial markets and the potential spillover to the euro area real economy. These risks should be contained by effective action by all policy-makers in the euro area."
    In September the inflation rate in the 17-nation euro area inflation rose to 2.7 percent from 2.6 percent in August, a higher-than-expected rate, Draghi said, that mainly reflected past increases in indirect taxes and energy prices.

    "Over the policy-relevant horizon, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain moderate," he added.
     Growth in the euro area remains very weak, with its Gross Domestic Product shrinking by 0.2 percent in the second quarter from the first following zero growth in the first quarter. On an annual basis, the economy was 0.5 percent smaller in the second quarter of this year compared with the same quarter in 2011.



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