Thursday, May 8, 2014

ECB holds rates, repeats ready to ease further

    The European Central Bank (ECB) maintained its key refinancing rate at a record low 0.25 percent and reiterated that it would continue with a high degree of monetary accommodation and was ready to act swiftly with further easing, including the use of unconventional measures, to tackle the risk of "a too prolonged period of low inflation."
    ECB President Mario Draghi told a press conference in Brussels that the moderate economic recovery in the euro area was continuing in line with expectations and price pressures were subdued, but medium and long term expectations were still anchored to the bank's objective of inflation that is below, but close to 2.0 percent.
    "Looking ahead, we will monitor economic developments and money markets very closely," Draghi said, adding that "possible repercussions of both geopolitical risks and exchange rate developments will be monitored closely.
    ECB officials have recently expressed their concern over the impact of the high exchange rate of the euro and overnight, interbank rates for the euro, known as Eonia, have recently moved higher. Higher market rates and the strong euro have the effect of dampening economic activity and making euro area exports less competitive internationally.

    "We firmly reiterate that we continue to expect the key interest rates to remain at present or lower levels for an extended period of time," Draghi said. The ECB last cut its rate in November 2013 after a cut in May for a total cut of 50 basis points last year after a 25 point cut in 2012.
    The euro has been firming since March last year and was trading just below 1.39 to the U.S. dollar today, up 1.5 percent since the end of 2013.
    Euro area inflation rose slightly to 0.7 percent in April from 0.5 percent in March, mainly due to higher services prices, as Draghi said he had expected.
    He expects inflation to remain around the current levels over coming months but new projections will be released in June.
    In March ECB staff cut the inflation forecast for 2014 to 1.0 percent, but maintained the 2015 forecast at 1.3 percent and is forecast to average 1.5 percent in 2016, still below the ECB target.
     Economic growth in the euro area rose by 0.2 percent in the fourth quarter of 2013 from the third quarter. On an annual basis, Gross Domestic Product rose by 0.5 percent, the first expansion on a year-on-year basis in the last eight quarters.
   But unemployment remained unchanged at 11.8 percent in March.
    "Recent data and survey indicators confirm that the ongoing moderate recovery continued in the first quarter and at the beginning of the second quarter," Draghi said.
    The ECB's March forecast fore 2014 growth was revised up to 1.2 percent from 1.1 percent, and the 2015 growth forecast to 1.5 percent from 1.3 percent.
    The OECD also lifted its 2014 growth forecast to 1.2 percent from a previous 1.0 percent, and the 2015 growth forecast to 1.7 percent from 1.6 percent. But the inflation forecast was cut to 0.7 percent this year from 1.2 percent and there 2015 inflation forecast to 1.1 percent.



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