Frankfurt - Officials were ready to keep interest rates low for an extended period, European Central Bank (ECB) president Mario Draghi said yesterday, underscoring the bank’s commitment to supporting the euro zones’s frail economy.
The governing council “continues to expect its key ECB interest rates to remain at present or lower levels for an extended period of time”, Draghi said at a press conference in Frankfurt yesterday after the ECB kept its benchmark interest rate at 0.25 percent.
The council’s new growth and inflation projections should fuel the debate over whether the central bank has done enough to prevent deflation and support the region’s economic recovery or whether it needs to turn to measures such as a negative deposit rate.
The ECB unexpectedly cut its main interest rates last month, reducing the deposit rate to zero. That rate was also left unchanged yesterday, as was the marginal rate, which stayed at 0.75 percent.
The ECB predicts the euro zone economy will contract 0.4 percent this year, before expanding 1.1 percent next year and 1.5 percent in 2015. Inflation will average 1.4 percent this year, 1.1 percent next year and 1.3 percent in 2015.
Previously, the ECB forecast inflation of 1.5 percent this year and 1.3 percent next year, with the economy contracting 0.4 percent and growing 1 percent, respectively.
One unprecedented option that officials have discussed is charging banks for the excess liquidity they park at the ECB, which would make it the first major central bank to venture into negative deposit rates.
One risk of such a move is that banks cannot pass the cost onto their depositors, squeezing their profit margins and deterring them from lending.
Other possible tools include asset purchases and long-term loans to improve credit flows. The ECB may decide to publish accounts of its monthly meetings to hone communication.
Since the ECB cut its key rate last month, data has shown that the euro area’s economic rebound came close to a halt with growth of just 0.1 percent in the third quarter. The French economy unexpectedly shrank and Italy extended its longest post-war recession.
“The recovery is weak,” Anders Svendsen at Nordea Bank Denmark said. “Risks are clearly skewed toward another rate cut and the door is likely to be left wide open to all non-conventional measures.”
Euro zone inflation was 0.9 percent last month, versus the ECB’s target of just under 2 percent, and prices are stagnating or declining in five of the 17 euro nations. That means economists and investors have been awaiting economic projections for 2015 to gauge the ECB’s need to act. – Bloomberg