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ECB holds key interest rate at 0.75%

ECB watchers say cutting rates will not contribute much to stimulating the recession-wracked economy right now
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First Published: Thu, Jan 10 2013. 08 57 AM IST
ECB watchers will be on the look out for whether central bank chief Mario Draghi will give any hint regarding a possible rate cut. Photo: AFP
ECB watchers will be on the look out for whether central bank chief Mario Draghi will give any hint regarding a possible rate cut. Photo: AFP
Updated: Thu, Jan 10 2013. 06 58 PM IST
Frankfurt: The European Central Bank (ECB) rang in the New Year with its rates on hold at an all-time low at its first policy meeting of 2013 Thursday, amid new signs the euro zone debt crisis could be easing.
As widely expected, the ECB’s decision-making governing council voted in favour of leaving the bank’s main refinancing rate at a historic low of 0.75%.
ECB watchers believe cutting rates would not contribute much to stimulating the region’s recession-wracked economy at the current juncture.
But they said they would listen out to see whether central bank chief Mario Draghi gave any hint as to when such a move might come at his regular monthly post-meeting conference.
“After the ECB left interest rates unchanged today as expected, the key question is whether Draghi will signal any future policy action at the press conference,” said Jonathan Loynes at London-based Capital Economics.
“We are not particularly hopeful,” he added.
Although some governing council members apparently voted for a rate cut last month, “a majority still seem lukewarm on the idea of imposing a negative rate on bank deposits at the ECB, as a cut in the main refi rate would probably imply,” Loynes argued.
And while Draghi would no doubt state again that the ECB stands ready to buy Spanish government bonds through its Outright Monetary Transactions (OMTs) programme, the current low levels of yields meant that Spain was under no imminent pressure to request such support, the expert said.
Both Spanish and Italian yields or borrowing costs eased markedly on Thursday, a sign of strengthening financial confidence.
“For now, then, the ECB remains on the sidelines. But if the news on the economy remains poor—and market concerns over Spain and other peripheral economies resurface—Draghi’s pledge to do whatever it takes to preserve the euro may soon be tested,” Loynes said.
At last month’s meeting, Draghi told reporters that the 23-member governing council had held a discussion on the merits of cutting rates but decided in the end to hold them at the record low 0.75%.
Since then, the euro zone economy has thrown up a mixed bag of data for ECB governors to chew over.
Unemployment has reached a record high of 11.8%, according to official figures, with nearly 19 million people without work in the embattled single currency zone.
Nevertheless, there were also tentative signs of recovery, with some forward-looking data providing encouragement.
Last week, the closely watched Purchasing Managers Index or PMI for the entire euro area hit a nine-month high, offering hope that the single currency area could be moving out of its deep double-dip recession.
Recent business confidence data for Germany, Europe’s biggest economy, have also come in better than expected. AFP
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First Published: Thu, Jan 10 2013. 08 57 AM IST
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