European Central Bank's Draghi says willing to act to help recovery, but keeps rates on hold
Oct 3, 2013 / 1:02 am
PARIS - European Central Bank head Mario Draghi said the eurozone economy is still fragile and the bank is willing to use "all available instruments" to keep market interest rates from rising and hurting a fledgling recovery.
He said the bank would even consider offering a third round of cheap, long-term loans to banks. The money injection would boost the flow of credit in the economy, hopefully helping growth in the 17-country currency bloc.
"We view this recovery as weak, as fragile, as uneven," Draghi said at a news conference.
Yet the ECB took no action Wednesday. It left its benchmark interest rate unchanged at a record low 0.5 per cent and shied away from any new stimulus measures, such as the credit offering.
Concern about a potential rise in market interest rates is a global phenomenon caused by expectations the U.S. Federal Reserve will scale back its stimulus program. The program has been keeping market rates down, not just in the U.S. but worldwide.
The ECB does not want to see higher rates in Europe, where the economy has just begun a recovery and still needs the support of low borrowing costs. The economy grew a modest 0.3 per cent in the second quarter, after six quarters of recession.
"We are ready to use all available instruments, including another LTRO," Draghi said, using the acronym for longer-term refinancing operation. The ECB has done two such operations in 2011 and 2012, handing out just over 1 trillion euros in cheap, three-year loans to banks. That helped steady the banking system during the worse days of Europe's debt crisis.
So far, the Fed has delayed its decision to start reducing its monetary stimulus program. That has helped keep market rates from rising any further and given the ECB some breathing room.
Draghi also held the door open to another interest rate cut if it's needed. He repeated the bank's stance that the ECB's key rates will stay at their current level or lower "for an extended period" until the economy improves.
Bank lending to business is anemic even at current low interest rates, both because banks are unwilling to risk loans in a weak economy and businesses don't see the new customers that would repay them to borrow and expand. "Credit flows are weak, I would say, very weak," Draghi said.
Inflation is low at an annual 1.1 per cent, giving the ECB room to add more stimulus. Lower rates and more credit can push inflation up, but weak growth has kept price increases down. The ECB's inflation goal is just under 2 per cent.
For the moment, Draghi seems content to let his words calm markets while holding off taking action.
Analyst said that is one reason the euro rose after the meeting, trading 0.6 per cent higher at $1.36, close to a one-year high. While Draghi expressed concern, he did not signal a move was imminent. Easier credit and lower rates can send a country's currency lower, but in this case foreign exchange traders apparently don't believe that will happen soon.
"The overall tone of the press conference was not dovish enough to signal an imminent move, which was reflected in the post-meeting euro reaction," Frederik Ducrozet at Credit Agricole said in a research note to investors. Dovish means ready to loosen monetary conditions, while hawkish means ready to tighten them by raising rates.
Another LTRO could also have its downsides, as a wave of cheap loans could encourage banks to depend on the ECB's largesse instead of fixing their finances.
The bank is headquartered in Frankfurt, Germany but held its meeting at the Bank of France in Paris. It regularly meets in other eurozone countries to underscore its role as the monetary authority for the entire currency union and its 331 million people.
McHugh contributed from Frankfurt, Germany.
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