ECB leaves interest rates unchanged at record lows

FRANKFURT • The European Central Bank left interest rates unchanged as expected yesterday, holding them at record lows as it prints money to lift the economy and raise inflation.

The decision to leave the cost of borrowing unchanged was unanimously expected by the 59 analysts polled by Reuters after the ECB cut its deposit rate deeper into negative territory last month after inflation prospects soured further.

At yesterday's meeting, the ECB kept its rate on bank overnight deposits, generally seen as its primary interest rate tool, at -0.3 per cent. The main refinancing rate, which determines the cost of credit in the economy, was unchanged at 0.05 per cent, while the rate on the marginal lending facility - or emergency overnight borrowing rate for banks - remains at 0.3 per cent.

ECB president Mario Draghi told a press conference after the announcement that the policy rates are expected to remain at present or lower levels for an extended period of time. "As we start the new year, downside risks have increased again amid heightened uncertainty about emerging market economies' growth prospects, volatility in financial and commodity markets and geopolitical risks."

The meeting of ECB's governing council comes shortly after it cut the deposit rate in December, raising the charge on banks for parking money at the ECB, and expanded its purchase programme to buy chiefly government bonds.

This recent action, albeit short of what many on financial markets hoped for, has led economists to conclude that no significant further steps would be before March.

"I believe the ECB will loosen policy but not today," said Commerzbank economist Joerg Kraemer. "A further reduction in the deposit rate could happen in March."

A similar view was held by UBS economist Reinhard Cluse. "The ECB is on hold for now. Draghi can say, 'We gave the medicine and now we have to let it work.' "

A cut to its forecast for March inflation, which the ECB has vowed to keep at close to 2 per cent, could prompt action. Its December projections were based on oil prices averaging US$52.20 this year, but Brent crude is trading around US$28 a barrel and 2022 oil futures are below US$50, indicating little confidence in a quick rebound.

REUTERS

A version of this article appeared in the print edition of The Straits Times on January 22, 2016, with the headline 'ECB leaves interest rates unchanged at record lows'. Print Edition | Subscribe