European Central Bank to hold key rates


FRANKFURT: The European Central Bank (ECB) opted to hold key rates at its first meeting of 2014 on Thursday, but analysts said that it may have to take more concrete action later.

As widely expected, the ECB’s policy-setting governing council left its rates unchanged at its regular monthly rates meeting.

The central “refi” refinancing rate was held at its current historic low of 0.25 percent and the two other key rates—the marginal lending rate and the deposit rate—were steady at 0.75 percent and zero percent, respectively.

No move had been on the cards after a surprise rate cut in November, but ECB President Mario Draghi was scheduled to explain the reasoning behind the decision—and possibly send some signals about subsequent policy measures—at his usual monthly news conference.

Draghi had effectively ruled out any rate moves at the end of December, when in an interview with the German news weekly, Der Spiegel, he said: “At the moment we see no need for immediate action.”

Capital Economics economist Jonathan Loynes said that the decision not to change policy had been priced in by the markets.

“But the pressure on the central bank to take more action to support the eurozone’s fragile recovery is likely to continue to build,” the expert said.

No further action
He expected Draghi to reiterate the message “that the ECB still has a ‘powerful artillery’ of policy weapons at its disposal, [but]he may not give any firm indications of further action.”

Nevertheless, if the news on the economy remained weak and the euro stayed strong, “the case for more stimulus will be overwhelming,” Loynes said.

The ECB took markets by surprise in November and pared back its central “refi” refinancing rate by a quarter of a percentage point to a record low of 0.25 percent. The reason behind the move was an expectation that the single currency area is facing a prolonged period of very low inflation.

Inflation is still low and the recovery cautious at best, but analysts believe that the central bank will leave policy at that for now.

In addition to changing interest rates, the ECB could pump more liquidity into the financial system via so-called LTROs, or Long-Term Refinancing Operations, to get credit flowing again between banks and businesses, crucial if any economic upturn is to be sustained.

For the moment, loans to businesses in the euro area are continuing to decline, new ECB data showed last week. Private sector loans dropped by 2.3 percent in November in a year-on-year comparison, after already contracting by 2.2 percent in October, the ECB calculated.

The ECB already pumped more than 1 trillion euros ($1.3 trillion) into the banking system at the end of 2011 and the beginning of 2012 to avert a potentially disastrous credit crunch.

But the banks preferred to use the ultra-cheap cash to buy up sovereign bonds rather than lend it on to businesses.

To mitigate this, the ECB is considering ways of channeling the cash directly to businesses if it decides to open the liquidity gates once again.



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