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ECB plays wait-and-see

April 4, 2012

The European Central Bank decided to hold its benchmark interest rate at a record low of 1.0 percent. The move aims to balance high inflation in the eurozone with a weak economic outlook.

Euro symbol in front of ECB headquarters
Image: picture-alliance/dpa

The European Central Bank on Wednesday announced it would leave its lowest interest rate of 1.0 percent unchanged for the time being. The decision once again resisted German political pressure to shape an exit from its crisis-fighting mode.

The ECB looked set to continue its wait-and-see strategy for an unspecified time as the eurozone's recovery from its debt dilemma is increasingly shaky and worries about Spain's struggling economy won't disappear.

ECB President Mario Draghi spoke of the danger of economic stabilization faltering in the euro area while prices were not likely to fall below the two-percent inflation target.

"The economic outlook remains subject to downside risks," Draghi said in a statement.

Annual inflation in the 17-member eurozone has been edging down less than predicted - to 2.6 percent in March from 2.7 percent in February of this year amid a spike in energy costs.

Slight recession ahead

The ECB said it expects the currency bloc's economy to contract by 0.1 percent in 2012 before expanding by 1.0 percent in 2013. The central bank believes it has done as much as it can to fight the debt crisis, also by pumping 1 trillion euros ($1.33 trillion) of cheap three-year loans into banks, hoping to ward off a credit crunch.

As an additional confidence-building measure, governments last week agreed to raise the eurozone's financial firewall to 700 billion euros.

Draghi did not hint on Wednesday when the central bank would prepare an exit from its unconventional crisis measures that had seen it loosen the rules for tapping funds.

Apart from leaving its benchmark interest rate of 1.0 percent intact, the European Central Bank also said its interest rate on its overnight deposit facility would remain at 0.25 percent.

hg/sms (Reuters, dpa)

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