Tags: European | Central Bank | Interest Rates | Economy

European Central Bank Keeps Rates Steady

Thursday, 06 March 2014 08:34 AM

The European Central Bank kept its interest rates unchanged on Thursday and raised its growth forecasts as it acknowledged that the recovery is strengthening.

After the decision to keep the key rate at a record low of 0.25 percent, ECB President Mario Draghi said the bank's latest projections foresee economic growth of 1.2 percent this year, up slightly from the 1.1 percent estimate made in December.

It trimmed its inflation forecast for this year, to 1 percent from 1.1 percent. But it said inflation will rise steadily to 1.7 percent by the last quarter of 2016.

Investors seemed to take the comments and forecasts as an indication the ECB is less likely to loosen monetary policy further in coming months. The euro rose on Draghi's comments, gaining about half a cent against the dollar to trade around $1.3800.

Some economists worry the eurozone might fall into deflation, a sustained drop in prices that can choke growth, though the ECB has said it doesn't expect that. Inflation in February was only 0.8 percent, well below the bank's goal of just under 2 percent. However, the core rate, which excludes volatile food and fuel costs, rose to 1.0 percent from 0.8 percent the month before.

Japan fell into deflation in the 1990s but Draghi drew an extended contrast between Europe and Japan, saying they were different. Inflation expectations remained steady in the eurozone, "and that was not the case in Japan," he said.

He added that the ECB had taken action in time: "We are taking early decisive action on the monetary policy front."

Some analysts were expecting the ECB to trim its deposit rate below zero, effectively penalizing banks for holding money at the ECB instead of lending it. Others though it might stop taking weekly deposits, which would cause an increase in the amount of money in the financial system.

A more far-reaching measure would be large-scale purchases of financial assets such as government bonds with newly created money, as the U.S. Federal Reserve has done. But that step faces legal, political and technical obstacles in a currency union with 18 members.

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The European Central Bank has kept its main interest rate at a record low of 0.25 percent, holding off on more stimulus as economic indicators suggest the modest recovery is gaining strength.
European,Central Bank,Interest Rates,Economy
Thursday, 06 March 2014 08:34 AM
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