ECB keeps rates on hold amid crisis fears

Main refinancing rate locked at a historic low of 0.75 per cent as central bank vows to keep policy stance steady as long as needed

PUBLISHED : Friday, 08 March, 2013, 12:00am
UPDATED : Friday, 08 March, 2013, 5:37am


The European Central Bank held its main refinancing rate at a historic low of 0.75 per cent yesterday, playing down concerns that political gridlock in Italy could trigger a resurgence in Europe's debt crisis.

The ECB's policy-setting governing council discussed a possible cut in interest rates at its regular monthly meeting, but the consensus was to hold them steady, ECB chief Mario Draghi told a news conference after the decision. With inflation in the 17-country euro zone expected to remain in line with the ECB's goal of close to, but just under, 2 per cent, "this will allow our monetary policy stance to remain accommodative", he said.

And the central bank's policy stance "will remain accommodative as long as needed," Draghi insisted.

He downplayed concerns that the political deadlock in Italy could destabilise the single-currency area as a whole and revive the sovereign crisis, which appears to have abated in recent months.

"If we look at contagion, you've seen that the contagion to other countries has been muted this time, contrary to what might have happened about a year-and-a-half ago," Draghi said.

"As you see, markets, after some excitement immediately after the elections, have now reverted more or less to what they were before."

The Italian-born central banker noted that financial markets were in a more confident mood than before and had recognised that elections were extremely frequent in the euro zone.

He also shrugged off concerns that reforms in Italy could stall given the uncertain political situation there.

"You have to consider that much of the fiscal adjustment that Italy went through will continue going on, on automatic pilot," Draghi said.

The ECB chief also unveiled the bank's latest updated staff projections for growth and inflation for the single-currency area.

The projections had the euro-zone economy contracting 0.5 per cent this year before recovering to grow 1 per cent next year.

The previous forecasts in December had pencilled in a contraction of 0.3 per cent this year and growth of 1.2 per cent next year.

The bank also slightly pared its inflation forecasts for next year, leaving its estimate for this year unchanged at 1.6 per cent.

It said it expected average inflation of 1.3 per cent in 2014, compared with the 1.4 per cent projected in December.

Newedge Strategy analyst Annalisa Piazza said she did not find the tone of the press conference "as dovish as anticipated."

"At the current juncture, the ECB seems to appreciate the relative positive development of recent surveys and the improved confidence shown by the liquidity markets," Piazza said.