Thursday, July 4, 2013

ECB to keep rates low for extended time and may cut

    The European Central Bank (ECB) said it will maintain an easy monetary policy stance for "as long as necessary" to boost economic growth and that it may even cut rates further.
    The ECB, which earlier today held its benchmark refinancing rate steady at 0.5 percent, said the risks surrounding its economic outlook remain on the downside and the recent rise in global bond yields "may have the potential to negatively affect economic conditions."
    Low interest rates will help "provide support to a recovery in economic activity later in the year and in 2014," ECB President Mario Draghi told a news conference, adding:
    "The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time," signaling that the central bank may cut rates if growth fails to improve.
    Draghi's admission that the recent rise in long-term interest rates may be harmful to growth in the 17 nations that share the euro follows a similar concern expressed by the Bank of England earlier today.
    In addition to the "recent tightening in global money and financial market conditions and related uncertainties," Draghi said other downside risks to growth include weaker-than-expected domestic and global demand and slow or insufficient structural reforms in the euro area.

    Long-term interest rates have risen worldwide in recent weeks following the Federal Reserve's decision on June 19 to start winding up its asset purchase program later this year as long as the economy continues to recover.
    But while the U.S. economy is growing, the euro zone remains mired in recession and Draghi is clearly worried that budding signs of improvement could be snuffed out by higher market rates. The ECB cut rates by 25 basis points in May to boost economic activity.
    In the first quarter of this year, the euro zone's Gross Domestic Product contracted by 0.3 percent from the previous quarter - it's sixth quarterly contraction in a row. On an annual basis, the economy shrank by 1.1 percent, up from a 1.0 percent contraction in the fourth quarter.
    Draghi said recent data had shown some improvement and exports should benefit from a gradual recovery in global demand later in the year and next year, with domestic demand supported by the ECB's accommodative policy as recent gains in real income due to the fall in inflation.
    "Overall, euro area economic activity should stabilise and recover in the course of the year, albeit at a subdued pace," Draghi said, repeating his outlook from June when the ECB cut its growth forecast.
    This year the ECB expects the euro zone economy to shrink by 0.6 percent, an improvement from 2012's decline of 1.5 percent.
    Inflation in the euro area rose to 1.6 percent in June, the third monthly rise since falling to a low of 1.2 percent in April. The ECB targets inflation of below but close to 2.0 percent.
    The ECB expects inflation to remain subdued over the medium term, supporting the bank's expectation to keep policy rates low along with weak economic growth.
    "The risks to the outlook for price developments are expected to be still broadly balanced over the medium term, with upside risks relating to stronger than expected increases in administered prices and indirect taxes, as well as higher commodity prices, and downside risks stemming from weaker than expected economic activity," Draghi said.


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