ECB holds rate steady, still sees recovery later in 2013

    The European Central Bank (ECB) held its benchmark refinancing rate steady at 0.75 percent, as expected, and said the euro area's economy is expected to remain weak but gradually recover later this year as improved financial market confidence supports domestic spending and stronger global demand helps boost exports.
    But ECB President Mario Draghi added that risks to the 17-nation euro area remain on the downside, mainly due to slow implementation of structural reforms, geopolitical issues and imbalances in major industrialised countries.
    "These factors have the potential to dampen sentiment for longer than currently assumed and delay further the recovery of private investment, employment and consumption," Draghi told a news conference, adding:
    "In order to sustain confidence, it is essential for governments to reduce further both fiscal and structural imbalances and to proceed with financial sector restructuring."
    The ECB's forecast for gradual recovery later this year is unchanged from last month's assessment.

    The euro area's economy remains in recession and Draghi expects the weakness to continue this year reflecting weak consumer and investor sentiment along with subdued foreign demand.
    In the third quarter, the euro area's Gross Domestic Product contracted by 0.1 percent from the second, following a 0.2 percent quarterly contraction in the second from the first. On an annual basis, the economy shrank by 0.6 percent in the third quarter, following a contraction of 0.5 percent in the second and a 0.1 percent contraction in the first quarter.
    The inflation rate was steady at 2.2 percent in December from November and Draghi said he expects inflation rates to decline further below 2.0 percent this year, based on futures prices for oil.
    "Over the policy-relevant horizon, in an environment of weak economic activity in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain contained," he said.
    The ECB cut its refinancing rate by 25 basis points in 2012 and last month revised downwards its economic forecast. The ECB targets inflation of below but close to 2.0 percent.

    For 2012 euro area's economy is forecast to shrink between 0.4 and 0.6 percent, down from 2011's expansion of 1.4 percent. 

    This year the economy is forecast to shrink by 0.9 percent or expand by 0.3 percent and in 2014 the euro zone's GDP is forecast to expand between 0.2 and 2.2 percent.

    The euro area's economy has been hard hit by a sovereign debt crises but the ECB's unveiling of its OMT bond-purchase program in September started an improvement in financial market sentiment.

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