European Central Bank keeps rates unchanged

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Associated Press

Posted on December 5, 2013 at 11:02 AM

Updated Thursday, Dec 5 at 11:05 AM

FRANKFURT, Germany (AP) — The European Central Bank kept its interest rates on hold Thursday even though the recovery has weakened in the 17-country euro currency union and inflation is forecast to remain low.

ECB President Mario Draghi said the bank was "ready and able" to take new steps to help the economy if that's needed." But he announced none.

The ECB left its benchmark rate at 0.25 percent at its meeting at its headquarters in Frankfurt, Germany, following a surprise quarter-point cut last month aimed at strengthening growth.

The refinancing rate determines what banks pay to borrow from the ECB and, through them, influences borrowing costs for businesses and consumers. In theory, a cut in the rate means businesses can borrow more easily — so they can invest in new production and create jobs.

But some banks are unwilling to lend at those low rates because they're worried about the economy and focused on fixing their own finances. That blunts the effect of the ECB's low-rate policy.

Draghi said the ECB had studied "a full array of instruments" that go beyond lower benchmark interest rates. "We are ready and able to act," he said.

He left it open, however, what the bank might do.

Besides cutting the benchmark rate, the ECB could give cheap, long term loans to banks, at the condition that the money is used for loans to businesses instead of hoarded in investments such as government bonds. It could also push the deposit rate it pays banks from zero into negative territory. That would in theory give banks an incentive to withdraw money from the central bank's deposit facilities and lend it.

Draghi said there had been a "brief discussion" of cutting the deposit rate to negative at Thursday's meeting.

ECB officials have said they could, in theory, also start large-scale bond purchases with newly-created money, as the U.S. Federal Reserve has done. That could drive down longer-term interest rates. But the economy would have to be so slack that it is threatened with deflation, a chronic fall in prices that kills off consumer spending and business investment.

Despite its inaction Thursday, the ECB will remain on alert because of the weak credit conditions in the eurozone, said Christian Schulz, an analyst at Berenberg Bank in London.

"More decisions to boost credit growth remain possible," he wrote in a research note, including the cheap loans to banks with the requirement that the money be loaned onward to businesses and consumers.

The ECB's stance contrasts with that of the U.S. Federal Reserve, which is expected to start reining in its stimulus as the U.S. economy grows more quickly than Europe.

The ECB is the top monetary authority for the 17 European Union members and their 331 million citizens who use the euro. It is the legal issuer of the currency and uses interest rates and other policy tools to keep inflation within stable limits — up or down. After that mandate is taken care of, it also seeks to promote growth and jobs.

The eurozone economy expanded only 0.1 percent in the third quarter and unemployment is 12.1 percent. Low inflation of only 0.9 percent is a worrisome sign of weakness and remains well below the bank's goal of just under 2 percent.

The ECB on Thursday cut its forecast for inflation next year, to 1.1 percent from 1.3 previously. It expects that rate to rise to only 1.3 percent in 2015.

The ECB nudged up its growth forecast for next year, to 1.1 percent from 1.0 percent previously, after an expected contraction of 0.4 percent this year.

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