Last updated: November 8, 2012 3:59 pm

ECB keeps interest rates on hold

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The European Central Bank kept its main refinancing rate on hold at 0.75 per cent on Thursday, shrugging off fears that the slowdown across the eurozone that is now hitting its biggest economy, Germany, warranted a cut.

Mario Draghi, president, said economic activity in the eurozone was expected to remain weak and risks to inflation gathering pace or slowing down were broadly balanced. The bank expects eurozone inflation to come down from 2.5 per cent to the bank’s target of close to, but below, 2 per cent next year.

“The risks surrounding the economic outlook remain on the downside,” he told a news conference and noted that monetary policy was “already very accommodative”.

One justification for holding off from any further rate cuts is that the ECB wants to give its as yet untested bond-buying programme more time to work. The so-called Outright Monetary Transactions scheme is designed to remove speculation from financial markets of a euro break-up, which the ECB says has been preventing its standard rate-setting actions from being effective in lowering borrowing costs for companies and households in countries with distressed bond markets.

No country has yet applied for OMT, which comes with fiscal conditions attached, although the very existence of the plan has already eased strains in several eurozone sovereign bond markets. Spain, the most likely candidate, has put off applying for help and repeatedly demanded that the ECB give it an explicit target of bond yield that it will target.

Mr Draghi again emphasised that the programme was ready to be implemented and reiterated that the ECB would not make any commitments.

“The governing council will take the decision in total independence,” he said. “There isn’t any automatic quid pro quo.”

Despite the early successes of the OMT programme even in its unused state, there are increased fears about the growth prospects for the 17-member eurozone and many economists have pencilled in an ECB rate cut in coming months.

Grim business sentiment indicators in Germany have been matched by weak data this week, with sharp month-on-month falls in industrial production and factory orders. On Thursday, official statistics showed German exports had fallen 2.5 per cent in September compared with the month before.

“Germany has so far been largely insulated from some of the difficulties elsewhere in the euro area,” Mr Draghi said in a speech on Wednesday.

“But the latest data suggest that these developments are now starting to affect the German economy,” he said, describing eurozone unemployment as “deplorably high” and the economic outlook as “weak”.

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