ECB expects euro zone to recover

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The euro zone’s economy should recover in the second half of this year as the worst of the region’s crisis subsided for now, European Central Bank (ECB) president Mario Draghi said yesterday.

“A gradual recovery should start” later this year as ECB measures worked their way through the economy, Draghi said after policymakers kept their benchmark interest rate at 0.75 percent. At the same time, risks to the outlook were on the “downside”, he added.

Draghi chaired the ECB governing council’s first decision of the year yesterday as the turmoil that has rampaged through the economy over the past three years shows signs of waning. A pledge last year to buy as many government bonds as it takes to stabilise the single currency, buttressed by political progress on bringing economies of the 17 member states closer together, has eased fears the bloc would fall apart.

Still, Draghi said needed balance sheet adjustments and “persistent uncertainty” were weighing on growth.

“Inflation rates are expected to decline further to below 2 percent this year,” Draghi said, and risks to the inflation outlook were “broadly balanced”.

The ECB held rates at a record low of 0.75 percent, refraining from a cut following fledgling signs of life in the euro zone economy and with inflation still above target.

The 17-country euro zone is in recession but recent data points to some stabilisation.

“This is not a surprise given some of the recent comments from the board, which did seem to play down the recent focus on interest rates,” Nomura economist Nick Matthews said of the rate decision.

A Reuters poll published on Monday had pointed to the central bank keeping rates on hold, although the economists surveyed were split on the chances of a cut in the next few months. Stronger survey data appeared to have strengthened the resolve of those at the central bank against a rate cut, Matthews said.

An improvement in euro zone business morale in December, when a survey also pointed to an easing service sector contraction, suggests a modest turnaround in the bloc after a grim fourth quarter.

Another cut of the refinancing rate would raise the question of whether the ECB would also lower its deposit rate, which would push it below zero, essentially charging a fee for banks to park money with it, for the first time.

Meanwhile, Bank of England policymakers refrained from adding further stimulus to the British economy yesterday after their new credit-boosting programme showed signs of success.

The monetary policy committee kept the target for quantitative easing at £375 billion (R5.1 trillion), as expected.

They also held the key interest rate at 0.5 percent.

Howard Archer, an economist at IHS Global Insight, said: “With the economy likely to continue to struggle to generate significant, sustainable growth, we expect the Bank of England to eventually give the economy a further helping hand.” - Bloomberg and Reuters


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