ECB holds interest rates at record low

PUBLISHED : Friday, 04 July, 2014, 1:41am
UPDATED : Friday, 04 July, 2014, 1:41am

The European Central Bank left interest rates unchanged at record lows yesterday, holding fire while it assesses the impact of a barrage of measures launched last month to pep up the flagging euro-zone economy.

The ECB held its main refinancing rate at 0.15 per cent and its deposit rate at minus 0.1 per cent, effectively charging banks for holding money overnight as it tries to encourage them to lend to small and medium-sized firms.

"The combination of monetary policy measures decided last month has led to a further easing of the monetary policy stance. The monetary operations to take place over the coming months will add to this accommodation and will support bank lending," ECB president Mario Draghi said.

He added: "The key ECB interest rates will remain at the present levels for an extended period of time in view of the current outlook for inflation. Moreover, the Governing Council is unanimous in its commitment to also using unconventional instruments within its mandate, should it become necessary to further address risks of too prolonged a period of low inflation."

The central bank is assessing the impact of the measures presented last month - cuts in its rates to record lows, and a series of steps to pump money into the economy - which it says could take up to a year to take full effect.

"This is as expected," Berenberg bank economist Christian Schulz said of the rate decision. "After the rate cut in June, they'll wait a couple of months, probably until the end of the year, to assess the effect that will have."

Banks used large parts of the last round of cheap ECB funding in 2011-2012 to buy higher-yielding government bonds and the question is how the ECB will avoid similar behaviour this time and steer the money towards company loans instead.

The ECB's decision last month to charge banks for parking their excess money at the central bank overnight has not yet reanimated money markets, but it is helping to keep short-term rates low and steady.