This article is from the source 'nytimes' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.nytimes.com/2012/11/09/business/global/euro-zone-interest-rate-remains-unchanged.html

The article has changed 6 times. There is an RSS feed of changes available.

Version 1 Version 2
Euro Zone Interest Rate Remains Unchanged Bank of England and E.C.B. Hold Rates Unchanged
(about 3 hours later)
FRANKFURT — The European Central Bank left its main interest rate unchanged Thursday, as expected, amid an atmosphere of relative calm in the euro zone that some analysts say could be deceptive. FRANKFURT — The president of the European Central Bank expressed satisfaction Thursday with progress toward resolution of the euro zone crisis, saying that members of the currency area had made “amazing” progress toward reducing government spending.
Meeting a few days after the first anniversary of Mario Draghi as E.C.B. president, the governing council left its benchmark interest rate at 0.75 percent, an all-time low. While pessimistic on the immediate outlook for economic growth on the Continent, Mario Draghi, the E.C.B. president, pointed to a number of indicators of reduced tension in financial markets, including a return of U.S. money market funds to the region and successful bond sales by Portugal and Ireland.
The British central bank, the Bank of England, also kept its benchmark rate at 0.5 percent, a record low, and left its bond purchasing stimulus program at £375 billion, or $600 billion, after the British economy emerged from a double-dip recession in the third quarter. “Fiscal consolidation that has taken place all over the euro zone is amazing,” Mr. Draghi said after the E.C.B. joined the Bank of England in leaving its main interest rate unchanged. “All this poises the euro area for a recovery that is probably going to be slow, but is also going to be solid.”
Britain’s economy grew 1 percent in the third quarter, its strongest quarterly growth since the global financial crisis started in 2008. But growth was helped by Olympic ticket sales, and some economists said the outlook for the economy remained gloomy. At the same time, Mr. Draghi seemed to leave the door open for a rate cut or other measures to stimulate growth in coming months, without committing to one. He said that inflation would probably fall below the E.C.B.’s target of about 2 percent next year, and signaled that next month the central bank was likely to revise downward its forecasts for euro zone growth.
At its regular monthly monetary policy meeting, the E.C.B. Governing Council left its benchmark interest rate at 0.75 percent, an all-time low.
“As expected, the E.C.B. kept its powder dry,” Carsten Brzeski, an economist at ING Bank, said in a note to clients.
The British central bank, the Bank of England, also kept its benchmark rate at 0.5 percent, a record low, and left its bond-purchasing stimulus program at £375 billion, or $600 billion, after the British economy emerged from a double-dip recession in the third quarter.
The economy grew 1 percent in the third quarter, its strongest quarterly growth since the global financial crisis started in 2008. But growth was helped by Olympic ticket sales, and some economists said the outlook remained gloomy.
“The big picture is that it's going nowhere, really,” Vicky Redwood, economist at Capital Economics, said. “Output is essentially stagnating. It’s a pretty dismal picture."“The big picture is that it's going nowhere, really,” Vicky Redwood, economist at Capital Economics, said. “Output is essentially stagnating. It’s a pretty dismal picture."
Mr. Draghi can claim much of the credit for holding the euro zone together since he assumed its most powerful financial post on Nov. 1, 2011. Under his watch the E.C.B. has made generous loans to euro zone banks and pledged to hold down borrowing costs for troubled euro zone countries. Mr. Draghi has vowed to do “whatever it takes” to preserve the common currency. Mr. Draghi’s appearance at a news conference Thursday came just over a year after he became E.C.B. president, and he used the occasion for a little self-congratulation. Mr. Draghi said that E.C.B. measures like unlimited, low-cost loans to banks had helped eliminate the risk that some banks would run out of cash.
So far, Mr. Draghi’s promise to intervene in bond markets has been enough to keep borrowing costs under control for Spain and Italy. The E.C.B. has not had to spend any money. Nor has Spain had to ask for a bailout from other euro zone countries. “Compare the situation today with what it was even a year ago,” Mr. Draghi said. “There has been substantial progress.”
But some analysts warn that the calm could prove temporary because the underlying causes of the crisis remain: too much debt and poorly performing national economies. He emphasized that the central bank remained ready to buy euro area government bonds to drive down prices and “avoid extreme scenarios.”
“The E.C.B. has been very active since Mr. Draghi has been president, and this has been a major factor contributing to stabilize financial markets and thereby avoid much worse outcomes for the euro zone,” Marie Diron, an economist who advises the consulting firm Ernst & Young, said in a note. So far, the mere threat of E.C.B. intervention in bond markets has been enough to drive down Spain’s borrowing costs from dangerous levels. Some analysts have questioned how long the calm can last, but Mr. Draghi refused to put pressure on Spanish leaders to ask for E.C.B. help, as they must do to receive it.
“But the E.C.B. is not the sole actor and cannot save the euro on its own,” Ms. Diron said. “Ultimately the sustainability of the euro zone is down to structural changes at the country and European levels that are beyond the E.C.B.’s remit.” “We stay fully ready to act,” Mr. Draghi said, adding, “It is entirely up to Spain and the Spanish government to take this decision.”
A rate cut Thursday would have been a surprise. Mr. Draghi has complained on numerous occasions that lower official interest rates are not helping the countries that need credit most. Market interest rates remain high for businesses and consumers in troubled countries. Mr. Draghi offered rare praise for euro area governments, saying they have done more to control spending than Japan or the United States. The Greek parliament’s approval of a sweeping series of austerity measures Wednesday “really represents progress especially if you compare the situation to a few months ago,” he said.
Banks in the euro zone can borrow unlimited funds from the E.C.B. at the benchmark rate, provided they post collateral. But banks are not obligated to pass that rate on to their customers and might not do so in countries like Spain where banks are already struggling with large numbers of bad loans.
Meanwhile, interest rates may be too low for countries like Germany, helping to fuel a rise in real estate prices, Dirk Schumacher, an economist at Goldman Sachs in Frankfurt, said.
“Cutting rates in the current environment of segmented markets is likely to boost growth in those places where it is needed least,” he wrote in a note to clients before the rate decision.
The E.C.B. has already taken unprecedented steps to reduce market tension, and its policy options are dwindling. The central bank is likely to hold off on further rate cuts until members of the governing council feel the need is more urgent.
In Britain, recent economic figures show that pressure on households is easing as unemployment and inflation start to fall. But the improvements have not been enough to translate into a marked improvement of consumer confidence. Debenhams and Marks & Spencer are among British retailers that recently gave cautious outlooks for their earnings.In Britain, recent economic figures show that pressure on households is easing as unemployment and inflation start to fall. But the improvements have not been enough to translate into a marked improvement of consumer confidence. Debenhams and Marks & Spencer are among British retailers that recently gave cautious outlooks for their earnings.
Prime Minister David Cameron, whose government is pushing ahead with an austerity program that includes welfare cuts and higher taxes, said last month that the economy was healing. But Mervyn King, the governor of the Bank of England, said two days later that it was difficult to know whether some of the recent positive signs would persist and that the recovery was slow and uncertain.Prime Minister David Cameron, whose government is pushing ahead with an austerity program that includes welfare cuts and higher taxes, said last month that the economy was healing. But Mervyn King, the governor of the Bank of England, said two days later that it was difficult to know whether some of the recent positive signs would persist and that the recovery was slow and uncertain.
On Wednesday, the European Commission cut its forecast for Britain’s gross domestic product to a 0.9 percent rise in 2013 from the 1.7 percent increase it predicted in May, partly because of risks from the euro zone. Even though growth remains weak, Britain is doing better than the euro zone. Germany, considered the growth engine of Europe, reported growth of only 0.3 percent in the second quarter.On Wednesday, the European Commission cut its forecast for Britain’s gross domestic product to a 0.9 percent rise in 2013 from the 1.7 percent increase it predicted in May, partly because of risks from the euro zone. Even though growth remains weak, Britain is doing better than the euro zone. Germany, considered the growth engine of Europe, reported growth of only 0.3 percent in the second quarter.
The manufacturing sector has also struggled, and output in September increased less than economists expected. House prices are unlikely to rise before 2014, according to the real estate firm Knight Frank.The manufacturing sector has also struggled, and output in September increased less than economists expected. House prices are unlikely to rise before 2014, according to the real estate firm Knight Frank.
In response to a controversy about a vacancy on the E.C.B.’s Executive Board, Mr. Draghi conceded that top management at the bank needs more women. The Governing Council, which includes the six-member executive board and the 17 heads of central banks in the euro zone, is entirely male.
Last month, the European Parliament rejected the nomination to the Executive Board of Yves Mersch, head of the central bank in Luxembourg, saying a woman should be named to the post. The vote was not binding on European leaders, however.
“We know we have to improve at management level,” Mr. Draghi said.
The E.C.B. also announced that it will introduce new bank notes in May 2013 that are designed to be harder to counterfeit and will eventually replace the existing notes. The notes will carry the face of Europa, a figure from Greek mythology.
Julia Werdigier reported from London. Lark Turner contributed reporting from London.Julia Werdigier reported from London. Lark Turner contributed reporting from London.