European Central Bank Leaves Key Rate Unchanged

As usual, Mr. Draghi was careful to qualify his upbeat assessment of the euro zone crisis, which is now entering its third year. Though financial markets have calmed and some economic indicators have stabilized, he said, it was too early to declare a turning point.

Also Thursday, the Bank of England decided to keep its benchmark interest rate unchanged amid a dismal economic outlook for 2013 that could keep the economy on the brink of another recession.

Mr. Draghi listed a number of indicators that the euro zone could be on the mend. Market interest rates on government bonds have fallen, while stocks have risen. The flow of bank deposits from troubled countries has reversed and euro zone economies have become more competitive, he said.

Where problems in one country once infected other members of the currency union, optimism is now spreading, Mr. Draghi said at a news conference following the regular monthly monetary policy meeting of the E.C.B. Governing Council.

“There is a positive contagion when things go well,” Mr. Draghi said. “That’s what is in play now.” But, he added, “the jury is still out. It’s too early to claim success.”

Mr. Draghi’s comments suggested the E.C.B. would not cut its main interest rate further, as some economists have argued it should, given that unemployment is at a record high and inflation is close to the central bank’s target of 2 percent and falling. Many businesses continue to have trouble getting credit, without which a recovery of the European economy is unlikely.

Some analysts read Mr. Draghi’s comments as simply a way of justifying the central bank’s inaction.

“Despite the pervasive weakness of the real economy in the single currency area, the E.C.B. is sitting firmly on its hands in the hope that the upturn in sentiment will eventually filter through to the real economy,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, said in a note Thursday.

But others agreed that there were tentative signs that the euro zone economy could emerge from an economic downturn soon. On Thursday, the Bank of France indicator of sentiment in French industry rose unexpectedly.

“Draghi is right to stress that several leading indicators have stabilized recently,” Jörg Krämer, chief economist at Commerzbank, wrote in a note to clients. “The recession in the euro zone is likely to come to an end in spring. This makes a further E.C.B. rate cut unlikely.”

While cutting interest rates is a standard policy tool of central banks, Mr. Draghi has often complained that the central bank has lost much of its influence over rates in troubled countries like Spain. Commercial banks there are already struggling with problem loans and reluctant to lend except at much higher rates.

The E.C.B.’s Governing Council may have concluded that a rate cut now would be superfluous, or even dangerous if it encouraged some investors to take too much risk. Mr. Draghi said Thursday that some recent leveraged buyout deals were overvalued, though such examples of risky behavior were limited.

Mr. Draghi was asked several times whether the central bank might consider other ways of encouraging credit, for example by emulating the Bank of England’s Funding for Lending Scheme, which rewards banks that lend more. Mr. Draghi said that existing E.C.B. programs were already comparable with what the Bank of England was doing.

The E.C.B has been allowing lenders to borrow as much as they want from the central bank at 0.75 percent, if they can provide collateral. But the E.C.B. cannot compel banks to pass on lower rates to customers, and many do not.

The Bank of England on Thursday decided to leave its interest rate at 0.5 percent, a record low, and also held its program of economic stimulus at £375 billion, or $600 billion.

Positive data from the manufacturing industry in December had surprised some economists, but many warned that the British economy would continue to move at a snail’s pace this year because households were reluctant to spend.

“It’s still not looking good,” Vicky Redwood, an economist at Capital Economics, said before the rate announcement. “The underlying picture is still flat.”

Britain had emerged from a recession in the third quarter, albeit with its economy growing slower than expected.

Many British consumers are concerned that a 2.7 percent inflation rate, which is above the Bank of England’s own 2 percent target, and that the government’s austerity program will squeeze their disposable income. Consumer confidence fell in December and the British Retail Consortium called the holiday sales “underwhelming.”

If the euro zone is indeed stabilizing, Mr. Draghi can probably take much of the credit. The turnaround began after he vowed last year to do whatever it took to preserve the euro zone and announced a program to buy bonds of countries whose borrowing costs were rising too high.

Mr. Draghi provided another example Thursday of how he has been willing to interpret the central bank’s charter more flexibly than his predecessor, Jean-Claude Trichet, a habit that has pleased investors.

The E.C.B.’s prime directive is to contain prices. But Mr. Draghi has been adept at using the language of price stability to justify broader goals. Mr. Draghi noted during the press conference that, unlike the Federal Reserve in the United States, the E.C.B.’s mandate did not require it to promote job creation. But he added that unemployment was “a very important factor in our assessment of price stability.”

Julia Werdigier reported from London.

Article source: http://www.nytimes.com/2013/01/11/business/global/european-central-bank-leaves-key-rate-unchanged.html?partner=rss&emc=rss