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European Central Bank Holds Rate Steady at 0.5% European Central Bank Holds Rate Steady at 0.5%
(about 1 hour later)
FRANKFURT — The European Central Bank left its benchmark interest rate unchanged at a record low Thursday, a decision that had been expected after recent economic indicators showed the euro zone economy was beginning to recover, albeit weakly. FRANKFURT — The European Central Bank left its benchmark interest rate unchanged at a record low Thursday, as the bank’s president, Mario Draghi, said he was “very cautious” about the strength of the euro zone economy.
The E.C.B. left its main interest rate at 0.5 percent, where it has been since May. Official data, confirmed Wednesday, showed that the euro zone has emerged from a recession that began in mid-2011, taking pressure off the central bank to stimulate the economy. The E.C.B. left its main interest rate at 0.5 percent, where it has been since May. Official data, confirmed Wednesday, showed that the euro zone has emerged from a recession that began in mid-2011, which was seen as taking pressure off the central bank to stimulate the economy.
However, bank lending, which is usually considered a precondition for economic growth, continues to decline. And countries including Spain, Italy and Greece continue to suffer from declining economic output. Mario Draghi, the president of the E.C.B., has said that official rates will remain low for an extended period, meaning that any increase is likely still a long way off. But Mr. Draghi said after the bank’s announcement that, despite some recent positive indicators of a euro zone rebound, “I can’t share the enthusiasm.”
At a news conference Thursday, Mr. Draghi repeated that the central bank expects to keep its key rates “at present or lower levels” for an extended period, citing only “tentative signs” of economic improvement and a return of confidence in the euro zone. “Those shoots are still very, very green,'’ said Mr. Draghi. As a result, he said, the central bank expects to keep its key rates “at present or lower levels” for an extended period. European stocks headed higher and the dollar reached a six-week high against the euro as Mr. Draghi spoke, as investors took his words as a sign of a continued low-interest-rate market.
European stocks headed higher, and yields on euro zone government bonds edged down, as Mr. Draghi spoke, as investors took his words as a sign of a continued low-interest-rate market. Mr. Draghi also acknowledged concern about events in Syria and the effect that the civil war might have on oil prices and on Europe’s tentative economic recovery. “We certainly are alert to the geopolitical risks that may come from the Syrian situation,” he said.
He also repeated his recent insistence that the central bank would not be willing to take any losses as the largest holder of Greek bonds in any sort of debt relief that international creditors might be planning for Greece. Replying tersely to a question on the topic, Mr. Draghi said that the E.C.B. charter prohibits it from financing governments.
According to official European Union data, the euro zone grew at an annualized rate of 1.2 percent in the second quarter of 2013, marking the end of a recession that began in mid-2011.According to official European Union data, the euro zone grew at an annualized rate of 1.2 percent in the second quarter of 2013, marking the end of a recession that began in mid-2011.
But the economic recovery has been mostly confined to Germany and a few other countries like Finland and Austria. Unemployment has leveled off in the euro zone as a whole, as well as in some of the most troubled countries like Spain, where there was even a small decline in jobless people in August.But the economic recovery has been mostly confined to Germany and a few other countries like Finland and Austria. Unemployment has leveled off in the euro zone as a whole, as well as in some of the most troubled countries like Spain, where there was even a small decline in jobless people in August.
It is unclear how much or how quickly German growth will spill over to the weaker countries, given that companies in Europe’s largest economy have shifted much of their attention to the United States and China.It is unclear how much or how quickly German growth will spill over to the weaker countries, given that companies in Europe’s largest economy have shifted much of their attention to the United States and China.
In addition, many of the underlying problems that led to the euro zone crisis remain, including undercapitalized banks burdened by portfolios of bad loans, and excess government debt which has forced cutbacks in spending. In addition, many of the underlying problems that led to the euro zone crisis remain, including undercapitalized banks burdened by portfolios of bad loans, and excess government debt which has forced cutbacks in spending. Bank lending, which is usually considered a precondition for economic growth, continues to decline. And countries including Spain, Italy and Greece continue to suffer from declining economic output.
The euro zone recovery is feeble and could be knocked off course, analysts warn.
“An oil shock or renewed market turmoil could easily undo this improvement,” Peter Vanden Houte, an economist at ING Bank, wrote in a note to clients Wednesday. “The E.C.B. will therefore have to continue its easy monetary policy.”“An oil shock or renewed market turmoil could easily undo this improvement,” Peter Vanden Houte, an economist at ING Bank, wrote in a note to clients Wednesday. “The E.C.B. will therefore have to continue its easy monetary policy.”
For now, inflation remains subdued in Germany, giving the E.C.B. space to keep rates low for the benefit of weaker countries. But as time goes on the E.C.B. could find it increasingly difficult to craft a monetary policy that helps the weaker countries while containing inflation in the stronger ones. For now, inflation remains subdued in Germany, giving the E.C.B. space to keep rates low for the benefit of weaker countries. But as time goes on, the E.C.B. could find it increasingly difficult to craft a monetary policy that helps the weaker countries while containing inflation in the stronger ones.