Thursday, April 4, 2013

ECB holds rate, but keeping very close eye on data

    The European Central Bank (ECB) held its benchmark refinancing rate steady at 0.75 percent, as expected, but signaled that it may cut rates if the economy continues to weaken by saying it will be monitoring economic data "very closely" in coming weeks for the impact on its monetary policy stance.
    The ECB, which cut its rate by 25 basis points in 2012, said economic activity remained weak at the start of this year but it is still projecting a gradual economic recovery in the second half of 2013.
    However, it stressed the downside risks to this forecast, including weaker-than-expected domestic demand and slow or insufficient structural reforms, which would "have the potential to dampen the improvement in confidence and thereby delay the recovery," ECB President Mario Draghi said in his prepared statement to a press conference.
    Last month ECB staff cut their growth forecast for the 17 nations that share the euro to a contraction in Gross Domestic Product of between 0.9 and 0.1 percent this year. In the fourth quarter of 2012, GDP shrank by 0.6 percent, the fifth quarterly contraction in a row, for an annual drop of 0.9 percent.
    "Against this overall background, our monetary policy stance will remain accommodative for as long as needed," Draghi said, adding: "We are also closely monitoring money market conditions and their potential impact on our monetary policy stance and its transmission to the economy."
    Draghi made no specific reference to recent events in Cyprus but said the fragmentation of euro area credit markets had to be reduced further so the ECB's policy stance could be transmitted throughout the euro area.
    Despite the ECB's low interest rates, there is a wide spread in the interest rates that businesses pay for loans in the euro area. Businesses in Southern Europe, for example in Spain and Portugal, pay much higher loan rates than those in Germany.
    Draghi called for further steps to establish a full banking union throughout the euro zone, saying in "light of recent experience" - an obvious reference to Cyprus - it is crucial that a single banking supervisor and a single resolution mechanism for troubled banks is implemented.
   Inflation in the euro zone continued to fall in March, with the annual rate down to 1.7 percent from February's 1.8 percent, mainly due to lower energy prices.
    Draghi said inflationary expectations remain in line with the ECB's price stability objective. The ECB targets inflation that is below, but close to 2 percent.
    Although most economists had expected the ECB to keep rates steady, a growing number were  expecting the bank to signal that it may ease policy later this year if the economy remains weak.
     The jobless rate in the 17 nation area was unchanged at 12.0 percent in February with rates in Greece and Spain above 50 percent.
    Last month the OECD said there was a strong case for the ECB to ease its policy given weak demand and inflation that is below its objective.
    "The risk of undue inflationary pressure associated with monetary easing is small, as the transmission mechanism is impaired, especially in the periphery countries where banks face high funding costs," the OECD said in its interim economic report.


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