ECB holds interest rates at 0.25%

The Governing Council of the ECB decided to keep its benchmark interest rate at 0.25%, which is already a record low. The interest rates on the marginal lending facility and the deposit facility will also remain unchanged at 0.75% and 0.00% respectively, the ECB announced today.

At a press conference in Frankfurt, Germany, ECB President Mario Draghi said incoming data confirms that the moderate economic rebound of the Eurozone is proceeding in line with expectations.

Other data are consistent with the ECB’s forecast of a long period of low inflation followed by a gradual increase in HICP inflation rates, he explained.

Draghi added:

“The signals from the monetary analysis confirm the picture of subdued underlying price pressures in the euro area over the medium term. Inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%.”

ECB holds interest rates but ready to act rapidly

The ECB assured markets today that it will monitor developments in the Eurozone very closely and will consider using all available instruments. Draghi said the central bank’s Governing Council is resolute in its determination to maintain a high degree of monetary accommodation and to act promptly if it has to.

Regarding interest rates, Draghi said:

“Hence, we do not exclude further monetary policy easing and we firmly reiterate that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time.”

“This expectation is based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy, the high degree of unutilized capacity and subdued money and credit creation.”

“At the same time, we are closely following developments on money markets. The Governing Council is 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.”

Growing call for quantitative easing

Some analysts had expected the ECB Governing Council to vote for a further drop in interest rates after inflation in the Eurozone fell to a five-year low in March (0.5%).

The Eurozone’s inflation rate has been falling further each month for the last three months. Inflation has remained below what Draghi once called “the danger zone” of 1% for the last six months.

The ECB’s benchmark interest rate has remained at 0.25% since November 2013, when the central bank warned of a prolonged period of low inflation.

Europe in danger of low-flation or deflation

On Wednesday, Christine Lagarde, Managing Director of the IMF (International Monetary Fund), warned of the danger of low-flation globally, especially in Europe.

When inflation is very low for a long time, businesses and consumers postpone spending because they expect prices may possibly fall. This results in falling demand and output, which undermines economic growth and stifles job-creation.

Deflation is when prices start to fall. Consumer spending dries up even more (for the same reasons), when wages begin to decline individuals’ debt burdens rise and the economy has a greater likelihood of sliding into recession or depression.

The Eurozone has already gone through a prolonged period of very low inflation. A growing number of economists are expressing fear today of a real danger of deflation.

Even if the ECB had decided not to lower interest rates, many had hoped it would introduce some kind of quantitative easing akin to the US Federal Reserve’s bond-buying program.

In an interview with the BBC, Howard Archer, chief European and UK economist at IHS Global Insight said the case for taking interest rates down to zero was strong, “However, the ECB will likely have taken some comfort from ongoing evidence that gradual eurozone economic recovery is continuing and there has not been an ‘unwarranted’ tightening in money markets.”