European Central Bank

Euro rate stays at 0.5 per cent

ECB sticks with record low interest rate to support prospects of economic recovery from lengthy recession later in the year

PUBLISHED : Friday, 07 June, 2013, 12:00am
UPDATED : Friday, 07 June, 2013, 3:46am

The European Central Bank kept its main interest rate on hold at a record low 0.5 per cent yesterday, saying that improved economic data in May confirmed its forecast of a gradual recovery from prolonged recession later this year.

The bank's president, Mario Draghi, told a news conference that the bank's easy monetary policy "should continue to support prospects for an economic recovery later in the year" and it would remain "accommodative" for as long as necessary.

He said the bank was still looking at ways to boost lending to small and medium-sized enterprises and revitalising the market for asset-backed securities but any action was "not for the short term".

The ECB slightly lowered its economic outlook for the euro area this year, saying output would decline by 0.6 per cent in 2013 but grow by 1.1 per cent next year. ECB staff forecast inflation of 1.4 per cent this year and 1.3 per cent in 2014, below the bank's target of under but close to 2 per cent.

Draghi said the rate-setting governing council discussed at its monthly meeting the possibility of cutting the rate at which banks deposit money with the central bank to below zero.

The ECB was technically ready to do so, but would keep this and other unconventional options "on the shelf" for now, he said.

Asked if the decision was unanimous, Draghi said there was a consensus that "there wasn't any direction change that would grant immediate action".

David Kohl, chief economist for Germany at Julius Bär, said: "This can be seen as a reaction to the slight improvement in the purchasing manager indices [PMIs], which seem to signal that the worst is over in the euro zone."

A firm majority of 81 economists polled by Reuters before the rate decision did not expect the ECB to cut its main refinancing rate or its deposit rate this month or in the near future.

Purchasing manager index surveys on Wednesday showed euro zone business activity shrank in May, but at a slightly slower pace. Downturns have eased in France, Italy and Spain, and Germany is stabilising, the data showed.

Inflation, which fell to 1.2 per cent in April, rose back to 1.4 per cent in May, while Eurostat confirmed the bloc's economy contracted by 0.2 per cent in the first quarter of the year.

ABN Amro economist Nick Kounis said: "If data were to disappoint going forward, then a refi rate cut becomes an option."

European shares extended falls and peripheral bond yields rose as Draghi spoke, after he cautioned against getting too optimistic about current market conditions.

Draghi kept up pressure on euro zone governments to maintain the pace of deficit and debt reduction, saying that countries should be given more time to correct excessive deficits only in exceptional circumstances.

At last month's post-rate decision news conference, Draghi said the central bank would look at negative deposit rates "with an open mind and we stand ready to act if needed."

However, ABN Amro's Kounis said: "It's not never-ever, but probably a lot would have to happen for it to happen."