Fri, Jan 11, 2013 - Page 15 News List

ECB keeps interest rates at 0.75 percent

Reuters, FRANKFURT, Germany

The European Central Bank (ECB) kept interest rates at a record low of 0.75 percent yesterday, refraining from a cut as the eurozone economy shows some signs of stabilizing and inflation still tops its target.

The 17-country eurozone is in recession, but recent data points to some stabilization, and ECB President Mario Draghi might strike a slightly more positive tone in the news conference that follows the rate decision.

A Reuters poll published on Monday pointed to the ECB keeping rates on hold, though the economists surveyed could not agree on the chances of a cut in the next few months.

“Rates are definitely on hold. Nothing has been spectacular enough in recent data to force the ECB to any action,” Deutsche Bank economist Gilles Moec said.

“There is a recession, but no further deterioration. Lending is weak, but also not deteriorating further, so the ECB is not compelled to act,” he said.

The Governing Council will find some comfort from improving business morale as well as a survey of purchasing managers, which gave tentative signs that the worst of the downturn may have passed.

“Since the December meeting key figures have generally surprised on the upside,” Nordea analyst Anders Svendsen said in a note to investors.

While the ECB had, in Draghi’s words, “a wide discussion” on reducing rates last month, the grounds for such a move have not grown and Executive Board members have argued against a cut.

Yves Mersch said last month he did not see the logic of a debate about the ECB cutting its main rate and Peter Praet said there was little room to cut.

Another cut of the refinancing rate would raise the question of whether the ECB would also lower its deposit rate — currently at zero — by the same amount, which would push it into negative territory, essentially charging a fee, for the first time.

Even though Draghi has said the bank was “operationally ready” for such a step, it has grown increasingly wary over the past couple of months, a source with knowledge of the ECB’s thinking said.

Negative deposit rates could deal a hefty blow to money market funds, which have already seen cash outflows since the ECB cut the deposit rate to zero in July last year. The rate is a peg for short-dated money market rates and at zero it is already almost impossible for funds to generate a return.

Executive Board member Joerg Asmussen said last month he would be “very reluctant” about the ECB cutting the deposit rate any further, adding that “our [monetary] policy is very accommodative.”

ECB staff projections published last month saw inflation at about 1.4 percent next year, which would usually justify another interest rate cut.

The bank also sees inflation falling below 2 percent this year with underlying price pressures remaining moderate.

However, inflation has eased more slowly than the ECB initially expected and as long as it misses the target a cut could be difficult to justify.

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