European Central Bank

European Central Bank adopts wait and see attitude on interest rates

PUBLISHED : Friday, 07 February, 2014, 5:17am
UPDATED : Friday, 07 February, 2014, 5:17am

The European Central Bank left interest rates unchanged, holding off fresh policy action to combat the threat of deflation while it waits for new staff forecasts next month.

The decision to leave rates on hold was expected by most economists as the bank awaits updated economic projections. A downward revision to the inflation outlook then could prompt a policy move.

The ECB held its main interest rates at 0.25 per cent. It also left unchanged the deposit rate it pays on bank deposits at zero per cent, and held its marginal lending facility - or emergency borrowing rate - at 0.75 per cent.

In London, the Bank of England voted to freeze its main interest rate at a record-low level of 0.5 per cent, where it has stood for nearly five years. The British pound fell for a second day against the dollar.

"The moderate recovery of the euro area economy is proceeding in line with our previous assessments," ECB president Mario Draghi told a news conference after release of the data.

"Inflation expectations for the euro area over the medium term to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below but close to 2 per cent," Draghi said.

"We are monitoring developments carefully and are ready to consider all available instruments. We remain firmly determined to maintain the high degree of monetary accommodation and to take further decisive action if required."

Across the Atlantic, the US trade deficit widened more than expected in December as exports fell, which could see the advance fourth-quarter growth estimate trimmed.

The US Department of Commerce said the US trade gap increased 12 per cent to US$38.7 billion. November's shortfall on the trade balance was revised to US$34.6 billion from the previously reported US$34.3 billion.

The number of Americans filing new claims for unemployment benefits fell more than expected last week, in a boost to the labour market outlook and the broader economy. Initial claims for state unemployment benefits declined 20,000 to a seasonally adjusted 331,000, the labour department said. Claims for the prior week were revised to show 3,000 more applications received than previously reported.

The market took the ECB decision in stride.

"Unchanged rates was our expectation … though we suspect it may have been a close call and may disappoint some," said Nick Matthews, an economist at Nomura.

The euro rose after the ECB announcement and German Bund futures extended falls.

Money market traders had expected no change in rates, nor any other steps to combat falling inflation or prop up the euro zone, a Reuters poll taken on Monday showed.

The ECB is wary of inflation getting stuck in what Draghi has dubbed a danger zone below 1 per cent.