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article imageECB holds fire on rates, but says ready to act if needed

Simon Morgan (AFP).
By Simon Morgan (AFP)     Feb 6, 2014 in Business

The European Central Bank played down deflationary fears and held its key interest rates steady on Thursday, but vowed to do whatever was needed to get the eurozone economy back on its feet.

As largely expected, the ECB left its central "refi" or refinancing rate unchanged at 0.25 percent at its monthly policy meeting.

It also held its other two key rates -- the marginal lending rate and the deposit rate -- unchanged at 0.75 percent and zero percent respectively.

ECB chief Mario Draghi told reporters that the decision to hold rates steady "has really to do with the complexity of the situation ... and the need to acquire more information."

There had been speculation that the central bank could ease monetary conditions in the 18 countries that share the euro after area-wide inflation came in lower than expected last month.

ECB board member Yves Mersch unveils a new 10-euro banknote at ECB headquarters in Frankfurt  German...
ECB board member Yves Mersch unveils a new 10-euro banknote at ECB headquarters in Frankfurt, Germany on January 13, 2014

On an annual basis, the rate of inflation slowed to 0.7 percent last month from 0.8 percent in December, way below the ECB's target of just under 2.0 percent.

The slowdown fuelled concern that the single currency area could soon slip into a deflationary spiral -- a vicious circle of falling prices.

But while Draghi acknowledged such fears, he insisted that the region was not experiencing deflation.

"Is there deflation? The answer is 'No'," Draghi told the regular post-meeting news conference.

Nevertheless, the ECB was keeping a close eye on price developments and would act if necessary, Draghi said.

"We are ready to consider all available instruments. Overall, we remain firmly determined to maintain the high degree of monetary accommodation and to take further decisive action if required," he said.

The ECB already took action in November when it pared back its interest rates to their current ultra-low levels, Draghi said.

And the central bank "continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time," he said.

But the signs all suggested that the euro area was set to recover, Draghi insisted.

Mario Draghi at a promotional event at the World Economic Forum in Davos on January 23  2014
Mario Draghi at a promotional event at the World Economic Forum in Davos on January 23, 2014
Eric Piermont, AFP

'Postponed, not abandoned'

"The ECB kept its powder dry at today's meeting," said ING DiBa economist Carsten Brzeski.

"As expected, it must have been a very close call. (But) president Draghi stressed the ECB's determination to act again if money market tensions were to increase and/or the medium-term inflation outlook worsen. Postponed is definitely not abandoned," Brzeski said.

Brzeski found it noteworthy that "for the first time in a long while, (Draghi) started by stressing the recovery and only then moved to inflation developments. Recovery hopes won from deflation fears," the expert said.

Berenberg Bank economist Christian Schulz felt that while the ECB had not taken any action this week, "the door to further steps remains wide open as headline inflation stays weak".

"The March meeting in particular, when the ECB's inflation forecast for 2016 will be published, could be crucial," Schulz said.

IHS Global Insight economist Howard Archer agreed.

"While the ECB held off from taking further stimulative action, both its statement and comments by president Draghi very much kept the door open to future action, and as soon as March," Archer said.

Tom Rogers at EY Eurozone Forecast said the decision by the ECB not to cut rates further "was to be expected, in light of the fact that the recovery is progressing broadly in line with expectations, and there are tentative signs of stabilisation in bank credit to firms."

However, the publication next month of the ECB's staff forecasts "will shed more light on the ECB's view on the risk of deflation," Rogers said.

"Downward revisions to inflation forecasts ... would no doubt reopen the debate about further monetary easing," Rogers said.

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