Thursday, April 3, 2014

ECB holds rate at 0.25%, Draghi to address media

    The European Central Bank (ECB) maintained its benchmark refinancing rate at 0.25 percent, as expected, along with its other main rates.
    The ECB said its president, Mario Draghi would comment on the reasons for this decision at a press conference later today.
    Most economists had expected the ECB to hold its rate steady despite a drop in March inflation to 0.5 percent from 0.7 percent, the lowest level since mid-2009 when the euro zone last experienced deflation. Inflation in the euro zone has been below 2 percent since January 2013. The ECB targets inflation of close to but below 2 percent.
    But the drop in March inflation appears to have been caused by an unusually warm winter that lead to weaker food and energy prices and the late timing of Easter.
    Last week Jens Weidmann, president of Germany's Bundesbank and a member of the ECB's governing council, said the central bank should not overreact to a slowdown in inflation that is caused by cyclical factors and therefore temporary.

    Weidmann also said that about two-thirds of the decline in inflation could be attributed to falls in energy and food prices and monetary policy should only respond to such factors in the event that it leads to second round effects on other prices.
    The ECB cut its refinancing rate by 50 basis points in 2013 and last month cut its 2014 inflation forecast to 1.0 percent but maintained the 2015 forecast at 1.3 percent.
    Last month ECB President Draghi said a moderate economic recovery in the euro zone was proceeding in line with expectations of "prolonged period of low inflation." He also repeated the ECB's guidance that policy rates are expected to "remain at present or lower levels for an extended period of time."
    The euro zone's Gross Domestic Product expanded by 0.2 percent in the fourth quarter from the third quarter, the third quarter of growth after six consecutive quarters of contraction. 
    On an annual basis, fourth quarter GDP rose 0.50 percent, the first quarter in seven quarters of year-on-year negative growth rates.

    But unemployment is still not improving, with the rate in February still stuck at 11.9 percent since October and only one-tenth of a percentage point below 12 percent, the highest level since 1995.


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