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ECB holds key rates steady, warns on recovery

The European Central Bank held eurozone interest rates unchanged, as expected, on Thursday (Aug 7), but kept the door open to further action and warned the region's fragile recovery could be faltering.

FRANKFURT: The European Central Bank held eurozone interest rates unchanged, as expected, on Thursday (Aug 7), but kept the door open to further action and warned the region's fragile recovery could be faltering.

The ECB's decision-making governing council decided to hold the bank's main refi refinancing rate steady at 0.15 per cent, the marginal lending rate at 0.40 per cent and the deposit rate at minus 0.10 per cent.

No new moves had been expected this month after the ECB unveiled a package of unprecedented measures in June - including negative interest rates and a new liquidity programme - in its battle to prevent the single currency area from slipping into deflation.

At his regular news conference, ECB president Mario Draghi pledged to "maintain a high degree of monetary accommodation". "The key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation," he said.

"Moreover, the governing council is unanimous in its commitment to also using unconventional instruments within its mandate, should it become necessary to further address risks of too prolonged a period of low inflation." Draghi insisted, however, that the ECB was sticking to its forecast for a "continued moderate and uneven recovery of the euro area economy".

SLOWING MOMENTUM

But he acknowledged there were downside risks, not least from the various flashpoints around the world, notably in Gaza, Iraq and Syria, and also from the Russia-Ukraine much closer to home.

News that Italy unexpectedly slipped back into recession in the second quarter has also highlighted worries about the eurozone's fragile recovery.

Draghi noted there had been "a slowing down in the growth momentum" in the 18 countries that share the euro and he predicted the region's economic recovery would remain "weak, fragile and uneven".

In particular, geopolitical risks "have increased and are higher than they were a few months ago," the ECB chief said. But their precise economic fallout was still very difficult to assess at this stage, he added.

Berenberg Bank economist Christian Schulz felt that "the current nervousness in financial markets has not reached the ECB's Eurotower headquarters in a significant way". Russia's President Vladimir "Putin and the other geopolitical risks have replaced deflation as the scare factor of choice," Schulz added.

Even though area-wide inflation slowed to just 0.4 per cent in July, the ECB believed that the economic recovery, albeit modest and uneven, "seems enough so far to gradually erode slack in the economy and thus reduce domestic deflationary pressures," Schulz said.

At the same time, the measures the ECB took in June and the emerging differences in outlook on monetary policy between the eurozone, the US and Britain "have led to a slight depreciation of the euro".

POLITICAL PRESSURE BUILDING

Markit economist Chris Williamson said "political pressures on the ECB to boost the economy are also building," notably from France and Italy. "But such political pressures hold little sway with the ECB," which in turn points the finger at national governments and the need to implement more reforms, Williamson said.

"The upshot is that the bar to further stimulus remains high, requiring a significant deterioration in the economic outlook," the expert said. "Until then, the ECB is in 'wait-and-see' mode, expecting growth and inflation to rise in the second half of the year as past policy initiatives and reforms take hold."

Commerzbank economist Joerg Kraemer predicted the ECB would maintain its "wait-and-see stance for the time being". Natixis economist Cedric Thellier said: "The heightened geopolitical risks, and the low inflation led Draghi to keep a dovish tone and leave the door open for further monetary policy easing." But that "is not our central scenario, at least not before the end of the year," Thellier added.