ECB agrees to maintain easy monetary policy

Retains refinancing rate for the eighth consecutive month

New Statesman
Photograph: Getty Images.

The European Central Bank (ECB) has agreed to maintain an easy monetary policy stance as long as needed, despite high unemployment rate and deteriorating economic activity in the eurozone.

“Our monetary policy will remain accommodative as long as needed,” said Mario Draghi, president of ECB.

Barclays’ analysts told the Financial Times (FT): “This commitment to an open-ended policy is something new, showing the ECB’s desire to see market rates remain close to zero despite the ongoing improvement in financial markets’ confidence towards the euro area.”

The ECB governing council has retained its rates for the eighth consecutive month despite few members arguing to reduce the main refinancing rate from 0.75 per cent.

Draghi said: “The recovery path is by and large unchanged. Later in 2013 economic activity should gradually recover, supported by a strengthening of global demand.”

ECB now predicts economy to contract by 0.5 per cent in 2013, from an earlier decline of 0.3 per cent. Inflation is now forecasted to slow to 1.6 per cent in 2013 and 1.3 per cent in 2014.

Ken Wattret, economist at BNP Paribas, told the Financial Times (FT): “The get-out-of-jail card for the ECB with these forecasts has been to suggest that they are merely an input for their discussions, so they can go on to ignore them. But it is stretching credibility for a central bank with one mandate to ignore its own current inflation projections.”

Alan Ruskin, currency strategist at Deutsche Bank, told FT: “The market went into this expecting Draghi to be [more] dovish. There’s a suggestion here that quite a lot of bad news is priced into the market.”

Signalling that the bank was less worried about the strength of the euro, Draghi, however, said that the level of the euro was very important for growth and price stability in the single currency bloc.

Commenting on the outcome of the Italian election, Draghi said that the poll has potentially left Italy without the protection of the ECB’s bond-buying programme.

Draghi reiterated that the euro’s exchange rate was not a policy target for the central bank.

Unemployment in France reached 10.6 per cent in the fourth quarter of 2012, while German economy recorded a 1.9 per cent monthly fall in January.

Meanwhile, the US Federal Reserve System said that interest rates will remain near zero until unemployment falls to at least 6.5 per cent.