PARIS: The European Central Bank held its key rates at all-time lows yesterday and promised to do everything possible to prevent tightening market conditions from choking off recovery.
At its monthly policy meeting — held in Paris instead of the central bank’s usual venue in Frankfurt — the ECB’s governing council voted to keep the bank’s key “refi” refinancing rate steady at an all-time low of 0.50 percent. .
At his traditional post-meeting news conference, Bank President Mario Draghi said he “expects the key ECB interest rates to remain at present or lower levels for an extended period of time.”
This was based on the assumption that the inflation outlook will remain subdued, the ECB chief said.
Nevertheless, there has been concern that rising money market rates may choke off the still very tentative economic recovery in the 17 countries that share the euro.
“The risks surrounding the economic outlook for the euro area continue to be on the downside,” Draghi said. “Developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions.”
Money market rates in Europe have indeed been rising recently amid talk about a so-called “tapering” or winding down of anti-crisis measures by the US Federal Reserve on the other side of the Atlantic.
Draghi said the ECB remained “particularly attentive” to such developments.
And it was “ready to consider all available instruments” to curb an unwarranted tightening, he said.
These included a so-called LTRO or long-term refinancing operation with which the ECB already flooded eurozone banks with more than ¤1 trillion ($1.35 trillion) in cash at the end of 2011 and the beginning of 2012 in a bid to avert a potentially disastrous credit crunch.
However, ECB watchers are still guessing when exactly such a move will be announced.
“We see a chance that the ECB will announce new measures towards the end of the year,” when the previous three-year LTROs will have only one year left to maturity, said Berenberg Bank economist Christian Schulz.
He suggested the ECB could provide new liquidity via another LTRO.
But it could “also just be an extension of the full allotment scheme beyond the current expiry date of end July,” he said.
Marie Diron of EY Eurozone Forecast said a new LTRO could help ease uncertainty as the ECB prepares its review of banks’ balance sheets.
“However, as Draghi stressed, providing liquidity should not be seen as a substitute for adequate capital positions,” the expert said.
“The eurozone’s banking sector needs stronger balance sheets to ensure robust growth in the medium-term.”
IHS Global Insight economist Howard Archer said he had “little doubt that the ECB will undertake a new LTRO.
“The only question seems to be when exactly it will do this and what time span will it be for,” Archer said.