ECB Downplays Italy Fears, Keeps Interest Rates On Hold

Last Updated: 8, March 2013

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The European Central Bank on Thursday left its benchmark interest rate at a historic low of 0.75 percent, after President Mario Draghi insisted that the political gridlock in Italy had little bearing to the region’s overall financial stability.

“That’s democracy,” Draghi said, when asked about the current impasse in Italy after last week’s elections. “We live in democracies…[but] after some excitement after the elections, markets have now reverted back more or less to where they were before,” Draghi told reporters, according to Bloomberg News.

[quote]”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 president added.[/quote]

Draghi, an Italian citizen himself, characterized much of his home nation’s deficit-reduction plans to be already on “automatic pilot,” playing down fears that Rome’s political stalemate would lead to a reversal of fiscal austerity.

“Italy, like all the other countries, should continue on the structural reform path” and build on the significant fiscal consolidation it has already achieved, the ECB chief said, as cited by the Wall Street Journal.

However, Draghi reassured the public that that the ECB would continue to keep interest rates low – in the event of any future volatility – and allow banks to borrow as much money as they wanted at the benchmark interest rate.

[quote]“Our monetary stance will remain accommodative as long as needed,” he said, reinforcing his vow last year to do “whatever it takes” to preserve the eurozone.[/quote]

The decision to keep rates on hold was in line with most market expectations. Nonetheless, according to a Reuters poll, a growing number of analysts are now calling for the bank to eventually cut its main refinancing to 0.5 percent.

“The door to a rate cut was not opened further, neither was it closed,” ING economist Carsten Brzeski said. “Rates should remain on hold unless the economic recovery fails to materialize in the coming months.”

[quote]”I think Mario Draghi is being a tad complacent when he says policy continuity is assured” in Italy, added Nicholas Spiro, head of Spiro Sovereign Strategy, a consulting firm. “This is a country that has given a resounding thumbs down to austerity and economic reform.”[/quote]

Draghi said that a rate cut had been discussed on Thursday, but gave no hint that further easing was on the cards.

Meanwhile, former Italian prime minister Silvio Berlusconi, whose party received 29.2 percent of the votes, was given a one-year jail sentence late Thursday for breach of confidentiality after the publication of illegally obtained wiretaps by a newspaper controlled by his family.

According to the New York Times, the jail sentence though is unlikely to ever be enforced; however, it promises to weaken his position ahead of negotiations to form a governing coalition.

“It will be difficult for Mr. Berlusconi to have an institutional role in the next government, either in the Senate or in any other Italian institution — he’s out of the game,” said Sergio Fabbrini, director of the school of government at Luiss Guido Carli University in Rome.

[quote]“But in the Italian public opinion, there won’t be any difference,” he added. “The country is already divided between those who think he is a criminal and those who think he’s a victim. It’s been that way for 15 years.”[/quote]

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