ECB leaves rates unchanged

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ECBJan92013 REUTERS The European Central Bank holds rates steady. Picture: Reuters.

Frankfurt - The European Central Bank left its key interest rate unchanged at a record low of 0.25 percent on Thursday despite worries about a weak recovery and low inflation.

Lower rates can help growth, but the bank has little room left to cut.

Analysts think it may try other steps such as offering cheap loans to banks on the condition they loan the money to companies.

Investors will listen closely to President Mario Draghi's news conference later in the day for clues about what the bank might do.

The ECB faces worries over weak inflation of only 0.8 percent annually.

That's a sign of anemic growth - and also makes it harder for financially troubled eurozone countries such as Greece to reduce their debt loads.

The ECB's goal is to keep inflation at just under 2 percent. Lowering the ECB's benchmark interest rate and easing terms when it lends to private-sector banks can help do that.

But so far, banks are often not passing on the ECB's low rate to customers in countries that need it the most.

The economy in the 18 countries that use the euro is going through a slow upswing as it recovers from recession, held back by a troubled banking system that has restricted lending and by governments' attempts to reduce debt by cutting spending and increasing taxes.

The eurozone grew only 0.1 percent in the third quarter.

Unemployment is 12.1 percent for the currency union as a whole, and a painful 27.4 percent in Greece and 26.7 percent in Spain - two countries that have struggled with debt, busted banks and enforced austerity.

Analysts say the ECB could eventually offer cheap, long-term loans to commercial banks on the condition the money is loaned to companies so they can expand their business.

Other potential stimulus measures have drawbacks.

The benchmark rate is already close to as low as it can go and in any case often isn't being passed on by banks.

Likewise, cutting the ECB deposit rate into negative territory - that is, charging banks to hold money at the ECB instead of paying them - could push them to lend.

But the banks could simply pass the costs on to their customers.

The central bank could also in theory try to increase the supply of money in the economy by purchasing financial assets such as government bonds using newly-created money, as the Federal Reserve has done.

ECB officials, however, have said such a step would be very complicated in a currency union with debt issued by 18 different governments. - Sapa-AP

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