ECB keeps rates steady despite cut in forecasts
European Central Bank president Mario Draghi and vice-president Vitor Constancio (right) at the bank's headquarters in Frankfurt, Germany, yesterday. Mr Draghi stuck to his view that the euro area economy would gradually recover later this year. photograph: ralph orlowski/bloomberg
The European Central Bank kept interest rates steady yesterday, despite trimming its economic forecasts for the year, as ECB president Mario Draghi expressed confidence in the euro zone economy.
Having predicted three months ago that euro zone GDP would shrink by 0.3 per cent this year, officials revised that figure downwards to 0.5 per cent.
However, Mr Draghi said he still expected the euro zone economy to recover later in 2013, pointing out that the downward revision was due to a carry-over from a weak fourth quarter last year. “The recovery path is by and large unchanged,” he said.
The poor economic performance of the euro zone over the past few months had prompted some analysts to predict a possible interest rate cut, but the “prevailing consensus” among officials was to leave the rates unchanged, Mr Draghi said.
His comments implied some disagreement within the 23-member council on the interest rate decision.
The ECB’s monetary policy stance would “remain accommodative”, Mr Draghi said.
This, coupled with strengthening global demand, would support a gradual economic recovery later in the year.
However, the governing council continued to see “downside risks” surrounding the euro area economic outlook, he warned: “The risks relate to the possibility of weaker-than-expected domestic demand and exports, and slow or insufficient implementation of structural reforms in the euro area.”
It was important for national governments to continue structural reforms, he said, adding that countries that had front-loaded fiscal adjustment would see “a gradual reduction in [the] contradictory effect of fiscal consolidation”, which would also contribute to the recovery.
Mr Draghi downplayed the impact of the inconclusive Italian election, pointing to market reaction. “Markets after some excitement after the elections have now reverted back more or less to where they were before.”
He said much of the fiscal adjustment in Italy would “continue going on automatic pilot”. Contagion, he said, had also been “muted” this time.
Asked about future rate cuts, Mr Draghi said the ECB would not “pre-commit to anything as specific as a rate cut in the future”. He also dismissed the possibility of a deposit rate cut.
On the issue of inflation, Mr Draghi said euro zone underlying inflation was 1.8 per cent in February, down from 2 per cent the previous month, according to Eurostat’s flash estimate.
“Inflation expectations for the euro area remain firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 per cent.”