ECB keeps powder dry to battle weak growth and low inflation in 2014 | Business| Economy and finance news from a German perspective | DW | 05.12.2013
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ECB keeps powder dry to battle weak growth and low inflation in 2014

The European Central Bank has left its key interest rate at a historic low, pausing to assess the impact of its recent rate cut on the eurozone economy. But more monetary action might be needed to spur growth in 2014.

The European Central Bank (ECB) had decided to keep its benchmark refinancing interest rate at 0.25 percent, the central bank for the eurozone announced Thursday, following a meeting of its rate-setting governing council.

Moreover, interest rates for its marginal lending facility, as well as for the overnight deposit facility would remain unchanged at 0.75 percent and 0.0 percent respectively.

The decision followed a cut by 0.25 percent in the benchmark repo rate in November in response to a strong fall in eurozone inflation which was stoking fears of deflation in the crisis-hit currency area.

In its medium-turn forecast for the next two year, which was also published on Thursday, the ECB predicted inflation to remain low on the back of subdued economic activity in the euro area. The central bank estimated annual inflation rates of 1.1 percent in 2014 and 1.3 percent in 2015 - well below the 2 percent desired by the ECB.

Inflation would remain low, the ECB said, because the eurozone economy was just slowly recovering in 2014, after a decline in gross domestic product (GDP) of 0.4 percent in 2013.

Downside risks

However, there were downside risks to this prediction, ECB President Mario Draghi told a news conference. Weaker than expected domestic demand and export growth, as well as insufficient implementation of structural reforms in eurozone countries could negatively impact economic activity, he said.

“Our monetary policy stance will remain accommodative for as long as necessary, and will thereby continue to assist the gradual economic recovery in the euro area,” he added.

Policy options weighed

Draghi also admitted that the ECB governing council had briefly discussed lowering the bank's overnight deposit rate to below zero. Such a move would actually punish banks for storing funds with the ECB instead of lending them to the real economy.

However, Draghi did not mention if the policy might be an option to spur lending, notably in the debt-laden southern eurozone countries.

Rethink on inter-bank loans

Commenting on speculation about a new round of low-interest ECB loans to banks (LTRO), Draghi noted that banks had used the money for buying government bonds and that not much of the funding made it into the economy.

"So if we are to do an operation similar to the LTRO, we're going to make sure this is going to be used for the economy," he added.

Loans to the private sector shrank by 2.1 percent in October, the biggest fall on record, ECB data showed last month, in a sign that the ECB's record low interest rates are not feeding through to the real economy.

uhe/ipj (Reuters, dpa, AFP)