Thursday, September 5, 2013

ECB confirms will keep rates low for extended period

    The European Central Bank (ECB), which earlier today held its benchmark repo rate steady at 0.5 percent, confirmed that it will keep its key rates at the current or lower levels for "an extended period of time," and revised upward its growth forecast for this year.
    ECB President Mario Draghi told a news conference that survey-based confidence indicators up to August had confirmed the bank's assessment that economic output will continue to recover at a slow pace for the rest of this year and into 2014 due to a gradual improvement in domestic demand.
    Exports from the 17-nation euro zone should also gradually improve and the overall improvements in financial markets since last summer appear to be gradually working their way through to the real economy while real incomes benefit from lower inflation.
    The ECB staff revised upwards its growth forecast for annual Gross Domestic Product to shrink by 0.4 percent, up from the June forecast for a 0.6 percent contraction, while growth is forecast at 1.0 percent in 2014, down from the previous forecast of 1.1 percent. In 2012 GDP shrunk by 1.5 percent.
    "Looking ahead, our monetary policy stance will remain accommodative for as long as necessary, in line with the forward guidance provided in July," Draghi said, adding: "The governing council confirms that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time."

    The ECB has not specified what it means by "extended period of time," but has said the expectation is based on its outlook for subdued inflation into the medium term given the broad-based economic weakness and subdued monetary dynamics.
    Draghi said money market conditions were characterised by a gradual reduction in excess liquidity with banks' repayment of funds from the ECB longer-term refinancing operations reflecting better market confidence, some reduction in financial market fragmentation and banks' deleveraging.
    "We will remain particularly attentive to the implications that these developments may have for the stance of monetary policy," Draghi said.
      In the second quarter, the euro zone GDP grew by 0.3 percent from the first quarter, the first quarter-on-quarter expansion since the third quarter of 2011. On an annual basis, GDP still shrank by 0.5 percent.
    Inflation in the euro zone eased to 1.3 percent in August, down from 1.6 percent, and Draghi said inflation expectations continue to be firmly anchored in line with the bank's aim of maintaining inflation below, but close to 2.0 percent over the medium term.


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