Wednesday, October 2, 2013

ECB ready to use all instruments if market rates rise

    The European Central Bank (ECB) repeated that it expects to keep its policy rates "at present or lower levels for an extended period of time," but added that it was keeping a close eye on conditions in money markets "which may have implications for the stance of monetary policy and are ready to consider all available instruments."
     The ECB, which last cut its benchmark refinancing rate to 0.50 percent in May, also repeated its guidance that its policy stance would "remain accommodative for as long as necessary" based on an unchanged overall outlook for subdued inflation given the broad-based weakness in the economy.
    Last month ECB President Mario Draghi told the European Parliament that he was ready to offer banks more long-term loans to keep money market rates from rising, mentioning the ECB's previous use of a long-term refinancing operation (LTRO) as an option.
    Overnight bank rates in the euro area have risen in recent months along with government bond yields, causing concern that it may threaten the economic recovery.
    Draghi told journalists in Paris that the latest data confirmed the ECB's view with underlying price pressures expected to remain subdued and inflation expectations firmly anchored around the ECB's target of inflation below, but close to 2.0 percent.

    Inflation in the euro area eased to 1.1 percent in September from 1.3 percent in August while the economy expanded by 0.3 percent in the second quarter from the first - the first quarterly growth after six consecutive quarters of contraction. On an annual basis, however, Gross Domestic Product still shrank by 0.5 percent.
    Inflationary pressures are expected to remain subdued due to weak demand and the "modest" pace of recovery and based on futures prices for energy, inflation rates are expected to remain at low levels in coming months, Draghi said.
     Recent industrial production data point to somewhat weaker growth at the start of the third quarter while confidence surveys up to September had improved, "confirming our previous expectations of a gradual recovery in economic activity."
    Economic output is expected to recover at a slow pace as domestic demand gradually improves and external demand for euro area exports strengthens. That said, Drahhi noted that unemployment remains high - it was unchanged at 12 percent in August from July - and the necessary adjustments in public and private sector balance sheets will continue to weigh on economic activity.
    As his custom, Draghi appealed to politicians to keep up their efforts to reduce deficits and put government debt ratios on a downward path along with strengthening their efforts to reform product and labour markets to help countries regain their competitiveness.


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