ECB holds rates at record low

The European Central Bank left interest rates at a record low yesterday but said it remained ready to act, acknowledging that emerging market turbulence could hit the eurozone.

Risks to the currency bloc’s economy remain skewed to the downside, ECB President Mario Draghi said after interest rates were held at 0.25 per cent, and inflation would be low for a protracted period.

“Developments in global money and financial market conditions and related uncertainties, notably in the emerging market economies, may have the potential to negatively affect economic conditions,” Draghi told a news conference.

“The reason for today's decision not to act has really to do with the complexity of the situation... and the need to acquire more information,” he said.

A sharp drop in eurozone inflation to 0.7 per cent in January, well below the ECB’s target of just under two per cent, would have focused policymakers’ minds, particularly since emerging turmoil could put further downward pressure on prices.

The ECB also left the deposit rate it pays on bank deposits at zero and held its marginal lending facility – or emergency borrowing rate – at 0.75 per cent.

The euro and eurozone money market rates rose in response.

If emerging market turmoil persists, a move is more likely next month when the ECB’s staff will produce fresh economic forecasts. If they downgrade their inflation estimate – already at just 1.2 per cent for 2014 – action could follow.

“Further information and analysis will become available in early March,” Draghi said, adding that the forecasts will include a first look at 2016.

Inflation expectations, he said, remained firmly anchored. If that assessment changes, then a significant policy response would be likely.

“There is certainly going to be subdued inflation, low inflation for an extended, protracted period of time, but no deflation,” Draghi said.

Money market traders had expected no change in rates, nor any other policy steps, a Reuters poll taken on Monday showed.

The Bank of England faces a different problem – trying to convince markets that resurgent growth will not require an early interest rate rise. It too left policy on hold yesterday.

The ECB is wary of inflation getting stuck in what Draghi has dubbed a “danger zone” below one per cent and vowed again to keep rates at present or lower levels for an “extended period”. An emerging market selloff risks forcing the euro higher, which would put more downward pressure on prices.

For now, economic recovery is intact, though still in its infancy. The eurozone's private sector logged its busiest month in two-and-a-half years in January, surveys showed on Wednesday.

“We must be extremely cautious about this recovery. It is still fragile and it is still uneven,” Draghi said.