European Central Bank Holds Rate Steady

Mario Draghi, president of the E.C.B., also noted during a press conference in Frankfurt that the error of the bank deposit tax was quickly corrected, and that Cyprus was “no template” for future crises.

He stressed the E.C.B.’s willingness to take action in response to threats to euro zone stability.

“If anything the events on Cyprus have reinforced the governing council’s determination to support the euro while maintaining price stability and acting within our mandate,” he said.

The muted market reaction to events in Cyprus showed “we are now in a position to cope with serious crises without them becoming existential or systemic,” he said.

Mr. Draghi spoke at a press conference after the governing council of the E.C.B. left its benchmark interest rate unchanged at a record-low 0.75 percent, as expected.

The Bank of England akept its benchmark interest rate unchanged on Thursday amid concern that the British economy fell back into recession at the beginning of the year.

The central bank decided to leave its interest rate at the record low of 0.5 percent, where it has been since March 2009. It also held its program of economic stimulus at £375 billion, or about $568 billion.

The governor of the Bank of England, Mervyn A. King, has been pushing this year for more fiscal stimulus to help the economy grow, but has been overruled by other members of the central bank’s interest rate setting committee. Mr. King is to be succeeded in three months by Mark J. Carney, the governor of the Bank of Canada.

The E.C.B. president faced pressure to reassure financial markets that he would not let a banking crisis on the island become a threat to the integrity of the euro zone.

Since Mr. Draghi’s last press conference a month ago, the second-largest bank in Cyprus has been shut down, wealthy depositors in Cyprus banks face huge losses on their holdings, and the country has imposed restrictions on large transfers of money to prevent a flight of capital.

The E.C.B. was a key player in events, in effect threatening to withdraw support for Cyprus banks unless local political leaders agreed to a bailout that would impose much of the cost on rich depositors, many of them Russians.

The turmoil in the small island nation has begun to blunt business confidence in the euro zone, threatening a recovery that was already shaky.

Data from Markit, a research concern, confirmed the continued downturn on Thursday, as a survey of business activity showed a marked drop in France and a stalling of growth in Germany, the largest and most robust euro zone economy.

The index fell to 46.4 in March, down from 47.9 in February and slightly lower than a preliminary reading of 46.5 two weeks ago, Markit said. The index has been below 50, the level that separates contraction from growth, in all but one of the 20 previous months.

The figure for France was 41.3 in March, the lowest level since February 2009 and down from 43.7 in February.

Germany’s economy, while still nominally growing, slowed to a crawl in March, with the index falling to 50.6 from 53.3 in February.

In keeping with the bank’s mandate to ensure price stability in the 17 European Union countries that use the euro, Mr. Draghi said that in coming weeks the E.C.B. would closely monitor the outlook for prices.

With inflation already below the E.C.B.’s target of about 2 percent, the statement could be interpreted as a sign that policy makers were more open to cutting rates in order to prevent deflation, a broad decline in prices that can be more destructive than inflation.

Mr. Draghi also said, however, that risks to prices stability are “broadly balanced.”

The E.C.B. chief is also under pressure to reassure investors and euro zone citizens that the E.C.B. will act to prevent an exodus of deposits from other weak countries like Italy or Spain, where banks are also troubled. A bank run in those countries would pose a much more serious threat to the euro than tiny Cyprus.

There are limits, however, to what the E.C.B. can do without violating its mandate. The E.C.B. can supply banks with cheap loans, but it cannot offer cash to replenish depleted bank reserves.

While European leaders have agreed to give the E.C.B. power to oversee euro zone banks, they remain divided on measures to protect bank depositors and to deal with failed financial institutions.

Events in Cyprus, which were unprecedented in the euro zone, have added urgency to the debate about a banking union.

“The ongoing busting of euro area taboos makes it more urgent to deliver economic recovery, as well as to accelerate banking union,” analysts at Barclays Capital wrote in a note before the meeting.

Jack Ewing reported from New York

Article source: http://www.nytimes.com/2013/04/05/business/global/european-central-bank-holds-steady-on-interest-rate.html?partner=rss&emc=rss