ECB sees 'tentative signs' economy stabilising

THE EUROPEAN Central Bank has said there are tentative signs of stabalisation in the European economy but urged European leaders to promote job creation without slippage in reform targets, and a “rigorous” implementation of the new euro zone fiscal framework.

President Mario Draghi called for “unambiguous and effective wording” in the new fiscal compact, currently under negotiation, after the ECB’s governing council agreed unanimously yesterday to leave unchanged its key interest rate at 1 per cent.

The Frankfurt central bank expressed concern for the eurozone’s economic outlook in 2012: despite “tentative signs of stabilisation”, continued financial market uncertainty was smothering economic activity and contributing to a climate of “high uncertainty and substantial downside risks”. Given that, euro zone inflation will remain at 2 per cent in the coming months before declining, according to ECB forecasts.

As the ECB governing council met, auctions of Spanish and Italian debt yielded significantly lower interest rates than last month. Italian 12-month bonds sold with a rate of 2.735 per cent, down from almost 6 per cent, while Spanish three-, four- and five-year bonds fell below 4 per cent.

The auctions raised €12 billion and €10 billion for Rome and Madrid respectively.

Mr Draghi said it was too soon to tell if yesterday’s drop in their bond yields was a permanent phenomenon.

Mr Draghi noted that “extraordinary progress” had been made on structural reforms in euro-area countries but said “swift implementation” of the fiscal compact was still “urgently needed”.

He was quick to stress his call for greater job creation efforts should not be seen as a “green light” for EU/IMF programme countries to ease up on austerity measures and reforms.

“You have to have job creation through structural reforms – that is the key – accompanied by price stability and fiscal consolidation,” he said.

The ECB’s decision to provide a total of €489.2 billion in low-cost, three-year loans to cash-starved euro-zone banks had already paid off as “insurance against the risk of being without liquidity”, he said.

Despite record overnight deposits with the ECB, indicating continued problems in the inter-bank lending market, money was now circulating in the economy with, he said, greater demand likely for a second wave of loans next month.

“We do think this decision has prevented a credit contraction that would have been much, much more serious.”

Quizzed about Swiss National Bank president Philipp Hildebrand, who resigned over allegations of insider trading, Mr Draghi said, “We will miss a very good central banker.”

The ECB’s strict ethical code, forbidding any direct or indirect insider trading by its members, meant it was impossible for a similar situation to arise in Frankfurt, he said.

Yesterday was the first governing council meeting since the appointment of several new members to the bank’s executive council. Mr Draghi dismissed reports of national tensions, in particular between new French and German candidates over the bank’s controversial bond-buying programme.

“The interested people were asked what they really wanted to do and we easily agreed the sharing of tasks and responsibilities,” he said.

Mr Draghi would not be drawn on the consequences of private sector losses on ECB-held Greek sovereign bonds, saying the bank is “watching and will make up our mind”.

However he welcomed that euro zone leaders recognised the “unique” nature of the Greek crisis meant that efforts at private-sector involvement in losses would not be repeated elsewhere.

Analysts interpreted the ECB president’s remarks yesterday as an indication the bank will consider another interest rate shift in March at the earliest.