ECB resists pressure to reduce interest rate

THE EUROPEAN Central Bank pushed back against the clamour for more emergency interventions to contain the sovereign debt crisis, saying the onus was on governments to act.

The bank brushed off pressure from International Monetary Fund managing director Christine Lagarde to reduce interest rates and kept its main rate at a record low of 1 per cent.

The decision was not unanimous, however. “A few members would have preferred to have a rate cut today, but I would say not many,” ECB chief Mario Draghi said. “This decision has been taken by consensus and the discussion was ... quite complete.”

He said the ECB was never pre-committed when asked whether it might cut rates next month, and offered little succour to critics who want the bank to embark on another round of ultra-cheap financing for banks.

Although he said analysts were not wrong to be alarmed over the present turmoil in the euro zone, he argued that EU leaders’ resolve to settle the crisis should not be underestimated.

“The interbank market is really very dysfunctional. It is not working – and we have a certain amount of fragmentation in all the other financial markets – in most of the other financial markets in the euro area.”

Even as he recognised that financial market tensions had escalated in the last three weeks with potential for spillover into the “real economy”, he said the disruption was still not at the level seen late last year.

Asked about concern in the US that the euro zone crisis could lead the global economy into a new slowdown, Mr Draghi said it was clear the situation in Europe was not the only factor at issue.

The ECB meeting came one day after G7 finance ministers convened an emergency teleconference on the crisis and resolved to co-ordinate their response to it.

While renewing three-month bank refinancing operations until mid-January, Mr Draghi played down any expectation that the ECB will revive the long-term refinancing operation (LTRO) scheme. This initiative, which released more than €1 trillion into the European banking system, is widely perceived to have prevented a credit crunch last winter.

The ECB is reluctant to repeat it for fear of dissuading governments from executing the fiscal consolidation and structural measures it believes are a prerequisite for overcoming the crisis.

“I don’t think it would be right for monetary policy to fill other institutions’ lack of action,” Mr Draghi said.

“The issue now is whether these LTROs would actually be effective and are there shortages in another part of the area.

“Then we should ask why: is this because of a lack of liquidity? Is this because of monetary policy? Some of these problems in the euro area have nothing to do with monetary policy.”

At the same time there was no indication that the ECB would revive sovereign bond purchases, an initiative sought by Spain but one which has been deeply contentious within the bank itself.

Dr Draghi said, however, that the ECB stood ready to act in the face of downside risks to the euro zone.

He called for a long-term vision for the currency from EU leaders, and said moves to step up deliberations on what that might involve were “highly important”.

A new quarterly economic analysis from the ECB forecast no change in the outlook for the euro zone this year, with a contraction between 0.5 per cent and 0.3 per cent in prospect.

Inflation was forecast in a range between 2.3 per cent and 2.5 per cent this year, above the ECB target of below but close to 2 per cent, and in a range between 1 per cent and 2.2 per cent next year.

About 15 protesters from the Ballyhea/Charleville anti-bondholder bailout group in north Co Cork gathered outside the front door of the ECB’s headquarters yesterday.

One of their placards read: “It’s Frankfurt’s way or Ballyhea’s way.”