ECB to hold rates at 0.75% as EU economy shows stability
The European Central Bank kept interest rates at a record low of 0.75% on Thursday in the absence of hard evidence that the eurozone recession is deepening and as inflation remains above its target.
The bank said in December it expects the eurozone economy to contract by 0.3% in 2013, after the region fell back into recession in the third quarter of 2012. But recent survey data suggest business confidence is recovering slowly despite signs that core countries such as Germany are suffering.
And inflation, while falling, remains above the ECB’s target of just under 2%.
“The decision was unanimous,” ECB President Mario Draghi said at a news conference after Thursday’s meeting. “If you look at the overall landscape… you see a significant improvement in financial market conditions and a broad stabilization of some [economic] indicators.”
Draghi cited rising stock and bond markets, strong capital inflows and a reduction in net loan redemptions in the eurozone, but acknowledged that the economy remained weak and would remain so at least for the first half of this year.
European equity markets have continued to rally this year and bond yields in weaker eurozone states have fallen.
Spain, which is relying on the European Union to bail out its troubled banks, sold more bonds than expected Thursday as it began a demanding borrowing program for 2013. Yields on Spain’s benchmark 10-year bond dropped below 5% for the first time since last March.
Draghi said the biggest risk to the economic outlook stemmed from a lack of action by European political leaders, particularly in the area of structural reforms to improve the region’s competitiveness. Much progress had been made in terms of fiscal reforms, but it would be wrong to ease off the gas now, he added.
