ECB says euro zone rates to stay low until recovery strengthens

Thursday 05 September 2013 17.36
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ECB President Mario Draghi says euro zone rates will stay low for an extended period
ECB President Mario Draghi says euro zone rates will stay low for an extended period
ECB keeps euro zone interest rates at 0.5%
ECB keeps euro zone interest rates at 0.5%

European Central Bank Mario Draghi says the still-fragile euro area economy has a long way to go before the bank raises its key interest rate rises from its current record low.

"I am very very cautious about the recovery," Draghi said today after the ECB's governing council kept its benchmark rate at 0.5%.

"I can't share enthusiasm. The shoots are very very green,'' the ECB President said.

The euro zone economy is only slowly recovering from an 18-month recession and grew by a modest 0.3% in the second quarter after six quarters of decline in a row.

The ECB raised its growth forecast for the euro area for this year to -0.4%, up from -0.6%. However, it trimmed its forecast for next year by one-tenth of a point to 1%.

The ECB president was at pains to reinforce the bank's stance that it will keep rates at the current low level or even lower for an extended period until the recovery is on stronger footing. Lower rates can stimulate growth.

Draghi said that a rate cut was talked about at the bank's monthly policy meeting and that some council members felt the recovery is "still too green to exclude this discussion."

The ECB has held off cutting its own benchmark rate further, and hopes markets will take to heart its promise that rates will stay low or go lower until there are signs the economic pickup is stronger.

Draghi has stressed the bank's low-rate stance because money market participants do not all seem to believe him.

While the ECB's benchmark, the rate at which it loans to private banks, has not changed, some money market and bond market rates that determine what banks and companies actually pay for money have risen. The ECB does not want to see that because it could hold back the recovery.

Market rates have gone up because people are anticipating the US Federal Reserve will reduce its bond-buying programme aimed at lowering long-term rates, and because of speculation the European and global economy may recover faster than expected.

This could push the ECB and other central banks to raise rates sooner than expected to ward off inflation.

The ECB President also said today that the bank was ready to take action if financial markets tightened liquidity too much in money markets. He said the bank could either pump out more liquidity or even cut interest rates.

"If money market developments were to be judged unwarranted, then such an instrument should be considered," Draghi told his regular monthly news conference.

The ECB chief today reiterated that the bank would not takes losses on its Greek bond holdings in order to give Greece debt relief. "It is pretty clear that we cannot do monetary financing," Mario Draghi said. When asked directly if the ECB would participate in Greek debt relief, he said: "No".

Greece is likely to need around €11 billion more to see it though 2015 as a result of a revenue shortfall, prompting expectations that it will need a third bailout. One method floated has been for current bond holders - of which the ECB is a major one - to re-negotiate repayments.

Read how the ECB has tried to calm the euro zone crisis

Earlier the Bank of England also kept UK interest rates at 0.5% today, while it left the scale of its quantitative easing (QE) programme to boost the money supply unchanged at £375 billion sterling.