Quantcast

Eurozone rates unchanged despite deflation fear

By David Mchugh

Associated Press

Published: Thursday, Feb. 6 2014 6:54 a.m. MST

In this Aug. 2, 2012 file photo President of European Central Bank Mario Draghi addresses the media during a news conference in Frankfurt, Germany.

Michael Probst, Associated Press

Enlarge photo»

FRANKFURT, Germany — The European Central Bank left its benchmark interest rate unchanged at a record low on Thursday, holding off on more stimulus despite weak economic growth and low inflation.

The bank's 24-member governing council kept the rate at 0.25 percent at a meeting in Frankfurt, Germany. Some analysts had thought the eurozone's monetary authority might cut the rate to 0.1 percent to try to boost growth more.

The ECB has predicted a gradual increase in growth this year. But unusually low inflation — of 0.7 percent annually at last count — has raised concerns that the 18 countries that share the euro as their currency may slide into deflation, a sustained drop in prices that can cripple the economy. The eurozone economy grew only 0.1 percent in the third quarter.

Markets were waiting to hear bank President Mario Draghi's outlook at a news conference later Thursday.

The bank is facing conflicting signals from the economy. Some indicators, such as surveys of business managers in the manufacturing and services sectors, suggest growth will pick up.

Other indicators are weak. Aside from the alarming inflation number, lending to companies and consumers remains subdued. Retail sales fell sharply in December, the holiday shopping month.

The benchmark rate is what the ECB charges banks for loans. Through the rate it influences the cost of credit for everybody else. Cutting the rate in theory makes it easier for people to buy new homes and for businesses to borrow and expand production.

However, rates are already very low and the stimulus impulse is not always getting through in the form of more lending. Some analysts think the ECB could lower the rate and take other actions in the coming months. That could include offering cheap loans to banks as a way to encourage lending and push down the cost of short-term credit in the market.

It's also theoretically possible for the ECB to buy bonds to pump newly created money into the economy, as the U.S. Federal Reserve, Bank of England and Bank of Japan have done. That step seems less likely. ECB officials have alluded to the complexity of bond purchases given 18 different governments that issue debt.

Get The Deseret News Everywhere

Subscribe

Mobile

RSS