ECB holds interest rate at record low
Chief banker says much slack remains in the economy.
FRANKFURT, GERMANY — The European Central Bank kept its benchmark interest rate on hold Thursday and raised its growth forecasts as it acknowledged that the recovery is strengthening in the 18 countries that use the euro.
After the decision to keep the key rate at a record low of 0.25 percent, ECB President Mario Draghi said the bank’s latest projections foresee economic growth of 1.2 percent this year. That is up slightly from the 1.1 percent estimate made in December.
Investors seemed to take the forecasts as an indication the ECB is less likely to loosen monetary policy further in coming months. The euro rose sharply, gaining a cent against the dollar to trade around $1.3850.
Yet Draghi warned that the economy still had so much slack to take up that the bank’s existing stimulus of low rates and easy credit to banks “will continue even though we see improvements in the economy.” The eurozone grew 0.3 percent in the fourth quarter but unemployment remains high at 12 percent.
The ECB trimmed its inflation forecast for this year, to 1 percent from 1.1 percent, and to only 1.5 percent in 2016. That is well below the bank’s goal of just under 2 percent. But it said inflation will rise steadily to 1.7 percent by the last quarter of 2016.
Some economists worry the eurozone might fall into deflation, a sustained drop in prices that can choke growth, though the ECB has said it doesn’t expect that. Inflation in February was only 0.8 percent, well below the bank’s goal of just under 2 percent. However, the core rate, which excludes volatile food and fuel costs, has edged higher.
Japan fell into deflation in the 1990s but Draghi drew an extended contrast between Europe and Japan, saying they were different. Inflation expectations remained steady in the eurozone, “and that was not the case in Japan,” he said.
He added that the ECB had taken action in time: “We are taking early decisive action on the monetary policy front.”
Some analysts were expecting the ECB to trim its deposit rate below zero, effectively penalizing banks for holding money at the ECB instead of lending it. Others though it might stop taking weekly deposits, which would cause an increase in the amount of money in the financial system.
A more far-reaching measure would be largescale purchases of financial assets such as government bonds with newly created money, as the U.S. Federal Reserve has done. But that step faces legal, political and technical obstacles in a currency union with 18 members.
Draghi said all those steps remained under consideration but would take time to study: “These projects have not been shelved.”
Draghi said that the recent turmoil in Ukraine would not have a large direct impact on the eurozone economy because trade flows were relatively small. Neighboring Russia has sent troops into Ukraine’s Crimea region after a pro-Russian president was ousted by a protest movement demanding closer ties to Europe. Draghi said the consequences of impact from broader geopolitical disruption were harder to assess.
He acknowledged that some European countries such as Poland might see the euro was “an island of stability” and accelerate efforts to join. But he said the broader considerations involved of national security “go well beyond the mind of a humble central banker.”