European Central Bank leaves interest rates unchanged

Interest rates were left unchanged by the governing council of the

European Central Bank

yesterday and speculation that it might introduce unconventional measures

to boost the euro area economy proved unfounded.

However, ECB president Mario Draghi said the governing council meeting, which was attended by European Commission vice-president Olli Rehn, had discussed the issue of "quantitative easing" or monetary policy that works through the purchase of assets. The issue had not been discussed at the previous month's meeting.

The bank left its main refinancing rate at 2.5 per cent, a record low, as the harmonised consumer price index for March fell to 0.5 per cent, down from 0.7 per cent in February. The fall came as a surprise, Mr Draghi said. He said the bank had underestimated the downward movement of global energy prices.

Low inflation
He said the council was concerned about dangers inherent in the "long period of low inflation" in the euro area that the ECB now expects.

However, he also said the moderate recovery in the euro area economy was proceeding in line with the ECB’s previous assessment, although the signals from the organisation’s analysis indicated “subdued underlying price pressures in the euro area over the medium term”.

He said the inflation expectation for the medium to long term continued to be "firmly anchored" in line with the bank's aim of maintaining inflation rates below – but close to – 2 per cent.

Unconventional instruments
On the possibility of introducing so-called quantitative easing measures, Mr Draghi said the council was "unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too-prolonged period of low inflation".

A long period of low inflation made it more difficult for economies to regain competitiveness through wages policies and also meant the real value of debt did not go down as fast as it otherwise would. There was also a danger that it would influence longer-term inflation expectations.

He did not accept suggestions the bank might lose credibility as it continued to fail to react to lower than expected inflation. He said the inflation rate could pick up in April, in part at least because of the “remarkably” late date for Easter this year. Easter usually has an effect on services prices.