ECB in no hurry to take action – Draghi

REUTERS

Mario Draghi, President of the European Central Bank (ECB) , addresses the media during his monthly news conference in Frankfurt, March 7, 2013. Draghi announced that the ECB leaves the interest rates unchanged. REUTERS/Kai Pfaffenbach (GERMANY - Tags: BUSINESS)

Eva Kuehnen and Sakari Suoninen Frankfurt

Markets had settled quickly after Italy’s fractured election result and any threat of contagion had been muted, European Central Bank (ECB) president Mario Draghi said yesterday, suggesting the bank is in no rush to take any action.

Italians delivered a strong rejection of austerity measures at elections last week and left no party grouping with enough support to form a durable government, raising the prospect of backsliding on economic reforms and debt-reduction measures.

“Markets after some excitement immediately after the elections have now reverted back, more or less, to what they were before,” Draghi said after the ECB held interest rates at a record low 0.75 percent. “You have seen certainly that the contagion to other countries has been muted this time, contrary to what might have happened about a year and a half ago. And this is another positive sign.”

The ECB has calmed the euro zone crisis with its pledge to buy government bonds in potentially unlimited amounts but it will only do so if a member country seeks helps from the bloc’s rescue fund and agrees to austerity policy conditions.

The programme, dubbed Outright Monetary Transactions (OMT), is yet to be deployed and Italy could find itself outside the ECB’s umbrella if it cannot form a government prepared to adhere to its rules. “OMT remains, is in place,” Draghi said. “It is a very effective backstop, and it is there. But you know the rules.”

A Reuters poll of economists showed uncertainty stemming from Italy’s election makes it more likely the ECB will have to help struggling countries by buying their bonds at some point, but with Spain, not Italy, the most likely recipient.

Although the decision to keep rates on hold met analysts’ expectations, a growing minority of respondents – 22 out of 76 – expect that, eventually, the ECB will cut its main refinancing to a new record low of 0.5 percent.

The euro climbed to a session peak against the dollar after Draghi gave no strong hint about monetary policy easing in the months ahead.

But there may have been a divergence of views on the central bank’s governing council. “The prevailing consensus was to leave the rates unchanged,” Draghi said.

When decisions have been unanimous, he generally says so.

ECB staff lowered their forecast for the currency bloc in 2013. Gross regional product is expected to contract by between 0.1 percent and 0.9 percent this year, below a previous range of minus 0.9 percent to plus 0.3 percent.

“Later in 2013, economic activity should gradually recover, supported by a strengthening of global demand and our accommodative monetary policy stance,” Draghi said.

He added that downside risks to the economic outlook prevailed, particularly if euro zone governments were slow to implement structural economic reforms.

Inflation ranges were “broadly unchanged” but if growth turned out to be weaker than expected then so would price pressures, Draghi said.

The ECB has singled out the uneven transmission of its record-low interest rates across the currency bloc as its main problem, which begs the question as to whether a rate cut would have much effect.

“Interest rates are not the problem, but the spread between interest rates in the euro zone’s core and the periphery. Not much can be achieved with a cut and the ECB seems to be aware of this,” said Michael Schubert, an economist at Commerzbank.

Italy’s inconclusive election last week could exacerbate the divergence and threaten the calm the ECB managed to impose with its pledge last September to do whatever it takes to preserve the single currency.

Analysts see actions targeted at funnelling money to small businesses and consumers as likelier than a near-term rate cut, which might not help the periphery of the currency bloc.

One move under consideration is tweaking the rules of securities against which the ECB lends money to banks, but some policymakers are sceptical of the central bank taking additional risk. – Reuters