ECB holds interest rate at 0.75% as Draghi warns downside risks remain

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The ECB left the main interest rate on hold at 0.75% at its latest monthly meeting, but the bank’s president Mario Draghi warned that economic risks remained on the downside.

However, there are signs markets are returning to more “normal” conditions, he said. 


“We are seeing better bond yields and country CDS [credit default swaps]. Stock markets are up, volatility is at historical lows and redemptions are one-fifth of what they were last September. And there are capital inflows into the eurozone,” said Mr Draghi.


He forecast that growth would resume towards the end of this year, but the recovery would be gradual.


At the post announcement briefing, Mr Draghi was asked whether Ireland’s successful bond auction on Tuesday qualified it for the OMT [outright monetary transaction] programme. A successful bond auction was just one of the criteria needed, he said.


There was a still a problem of credit flowing through to the real economy. The funding and capital positions of the banks have been greatly improved, but there were still huge problems with risk aversion and credit risk, he noted. The fact that there was up to 60% youth unemployment in Spain compared with 5% in Germany showed that there were still structural problems in the region. But the ECB’s mandate was price stability, not labour market reforms, said Mr Draghi.

Senior economic adviser to Ernst & Young, Marie Diron, said: “The ECB was remarkably balanced in their assessment of the economic outlook. We share their view that we are now in a more normal environment, in that very significant downside risks [Eurozone breakup, the US fiscal cliff and a slowdown in China] that prevailed last year have greatly diminished. While the ECB welcomed this normalisation, it was cautious not to get too optimistic and stressed significant challenges faced by the Eurozone economy, again an assessment of the outlook that we share.


“A rate cut seems very unlikely in the foreseeable future. In today’s conditions, it is probably true that a rate cut would not help a great deal and could hinder the banks’ profitability. Other measures are needed to spur growth in the Eurozone, including further progress on banking union and a rebalancing between fiscal austerity and economic reforms.”

Courtesy:  Irish Examiner

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