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Last updated: January 10, 2013 6:33 pm
The European Central Bank hailed a “normalisation” in financial market conditions on Thursday as its governing council voted unanimously to keep rates on hold, signalling confidence that the eurozone would stage a gradual recovery from recession later in the year.
The euro rallied against the US dollar, gaining 1 per cent on the day to touch $1.3195 as Mario Draghi, ECB president, spoke at a regular monthly press conference after its decision to leave its main refinancing rate unchanged at 0.75 per cent.
While cautioning that risks to growth “remain on the downside” in the eurozone, Mr Draghi started the year in upbeat mood, checking off a list of indicators of financial stress that had improved since the middle of last year when fears of a euro break-up peaked.
“Fragmentation is being gradually repaired but all of this hasn’t found its way through to the real economy yet,” Mr Draghi said. “We are now back in a normal situation from a financial viewpoint but we are not at all seeing an early and strong [economic] recovery . . . We observe a normalisation of certain conditions.”
Falling yields on sovereign bonds, strong capital inflows, an increase in bank deposits in crisis-hit eurozone countries, a shrinking of the ECB’s balance sheet and improvement in business confidence surveys were among the factors Mr Draghi cited as having improved.
“We spoke a lot about contagion when things go poorly,” Mr Draghi said. “But I believe there is a positive contagion when things go well, and I think that’s also what is in play now.”
The rate decision had been unanimous, the ECB chief said, a significant change from the last meeting in December when he spoke of a “prevailing consensus” on the 23-strong governing council to keep rates on hold.
“The ECB appeared to close the door to an interest rate cut in the near term at least,” Howard Archer, economist at IHS Global Insight, said in a note, adding that record unemployment in the eurozone and elusive growth could lead to further loosening in the second quarter of the year.
The European Central Bank is keeping a close watch on private equity and leveraged buyout deals as confidence returns to financial markets but sees no widespread signs of “exuberance” that might herald the next bubble, writes Michael Steen .
The bank’s loose monetary policy stance and its pledge to “do whatever it takes” to prevent a break-up for the euro had instead led to a “normalisation” of financial markets, said Mario Draghi, its president.
“You’ve seen the return of certain overvaluations in certain sectors of private equity deals and leveraged buyouts,” he said. “But these are still relatively defined and contained situations. You don’t see exuberance in other parts of the economy.”
“Our mandate is not full employment,” Mr Draghi said of the alarmingly high rate of unemployment, particularly among young people in Spain and Greece. “[But] we believe that ensuring price stability gives you the long-term foundation for growth and job creation.”
The ECB’s offer to buy an unlimited amount of bonds of eurozone countries with distressed bond markets that are subject to speculation of a euro break-up is credited with having done much to calm financial markets.
Mr Draghi made clear the bank felt it had done its part in creating the conditions for a recovery, but growth depended on Europe’s politicians pressing ahead with action to cut budget deficits and improve competitiveness through structural reforms.
“The risks [to an economic recovery] stem essentially from lack of action from the governments,” he said. “Structural adjustment, to regain competitiveness, to create a situation where you don’t have a permanent creditor and lots of permanent debtors – that’s where action is needed and will continue to be needed for the foreseeable future.”
Data from Germany – the “permanent creditor” Mr Draghi alluded to – next week are expected to show Europe’s biggest economy shrank in the final quarter of last year, but improving business confidence surveys are seen as a sign that economic output will begin to recover later this year.
With inflation gradually falling to the ECB’s target of close to but below 2 per cent over the medium term, its main goal of ensuring price stability is being formally met.
In a further, albeit tentative, sign of reduced tensions, ECB data published on Thursday showed that no banks had made use of its emergency overnight “marginal lending facility” for the first time since August 2011. The central bank charges a punitive 1.5 per cent interest rate to banks that use it. A sustained fall in the use of the facility would indicate a recovery in interbank lending.
Additional reporting by Claire Jones and Alice Ross in London
No need seen for mandate change
As other central banks are toying with novel targets, the European Central Bank is clear it sees no need to lobby for a change to its sole, legally enshrined, mandate: keeping inflation in check, writes Michael Steen .
While the Federal Reserve is offering long-term guidance on interest rates, and there is debate about whether the Bank of England should move away from targeting inflation to nominal income, Mario Draghi is unmoved by the discussion.
“Each central bank has its own institutional set-up, has its own statutory objectives and its mandate,” the ECB president said on Thursday.
“As far as our mandate, namely maintaining price stability, I think we’ve shown how to do it. And markets understood.”
The debate is linked to discussions over whether central banks are becoming subject to “political dominance” – an accusation Mr Draghi has sought to quash regarding the ECB and its own unorthodox policy making.
Its offer to buy unlimited sovereign bonds of crisis-hit eurozone states led to criticism in Germany that it was becoming a political plaything.
Mr Draghi has responded by insisting the bank will not agree to any specific purchases, but instead choose how and when to buy the bonds on its terms to protect the single currency.
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