ECB Holds Benchmark Rate At Record Low 1%

April 5, 2012Europe/Middle Eastby EW News Desk Team


The eurozone has announced it will keep the benchmark lending rate at the current 1 percent, with the ECB chief Mario Draghi saying it is still premature for the Bank to even consider an exit from its monetary easing policies.

For the last few weeks, analysts and policymakers have been discussing steps for a backup plan should the ECB decide to exit the money market after nearly three years, and 1 trillion euros of cheap bailout loans.

Speaking at a conference, Draghi said it was premature to talk about withdrawing the bank’s loans, given the weak macroeconomic outlook for the eurozone. This week, the European Commission said the 17-nation currency bloc is already at the brink of its second recession in three years.

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At the same time, eurozone unemployment rose to 10.7 percent in January, the highest level since the introduction of the euro in 1999. The region’s job woes were also compounded by an unexpected increase in the eurozone inflation that crept to 2.7 percent in February.

Draghi said:

Given the present conditions of output and unemployment, which is at an historical high, any exit strategy talk is premature.

He added that the bank was still analyzing the impact of the ‘powerful and complex’ effects of the 1 trillion euros loans it handed out in December and February this year.

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However, he stopped short of providing more help than is necessary, saying that the onus was on governments to stimulate growth through labour market and structural reforms. 

Referring to the downside risks, Draghi said the bank stands ready to reverse the ‘temporary measures’, should the liquidity injection put the regional financial system at risk of inflationary danger.

For now, Draghi said the outlook for inflation was ‘broadly balanced.’

Offering words of encouragement, Draghi said he expects to see some 'stabilisation’ in the markets, especially with recent improvements in the United States’ economy.

Speaking to Bloomberg, Julian Callow, chief European economist at Barclays in London, provided this summary:

Draghi’s main message today will probably be that the ECB has done its bit. One reason is that the ECB doesn’t really have another big rabbit to pull out of its hat, the other is that they really want to sit back and let governments get on with fixing the crisis.

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