Thursday, February 9, 2012

European Central Bank Holds Steady at 1.00%

The European Central Bank (ECB) kept its Main refinancing operations rate at 1.00%.  ECB governor, Mario Draghi, said: "Inflation is likely to stay above 2% for several months to come, before declining to below 2%. Available survey indicators confirm some tentative signs of a stabilisation in economic activity at a low level around the turn of the year, but the economic outlook remains subject to high uncertainty and downside risks.... A very thorough analysis of all incoming data and developments over the period ahead is warranted."

The ECB previously announced (noting further collateral approvals) a series of measures "to support bank lending and money market activity". These measures included longer-term refinancing operations (LTROs), reduction in the reserve ratio to 1% from 2% presently, and increasing collateral availability through reducing the rating threshold for asset-backed securities (ABS), and allowing national central banks to accept bank loans as collateral. Essentially the moves are designed to prevent a freezing up of credit markets and liquidity akin to that seen during the global financial crisis. 

Previously the ECB cut the interest rate by 25 basis points at its November and December meetings.  The ECB last increased the interest rates by 25 basis points at its July meeting; pausing in May and June, after raising the rate by 25 basis points to 1.25% in April last year.  The Euro Area reported annual HICP inflation of 2.7% in January, 3% in November and October and September, 2.5% in August and July, 2.7% in June (same as May) and above the Bank's inflation target of maintaining inflation below, but close to, 2% over the medium term. 

Euro Area reported quarterly GDP growth in the September quarter of 0.2% (1.4% y/y); the same as the June quarter of 0.2%, following a 0.8% increase in the March quarter, and a 0.3% increase in the December quarter of 2010.  The Euro (EUR) has weakened by about 3% against the US dollar over the past year, while the EURUSD exchange rate last traded around 1.33


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