European Central Bank president Mario Draghi has kept interest rates on hold and warned against declaring an end to the financial crisis, despite signs of stabilisation in the euro zone economy.
In a “unanimous” decision, the governing council of the ECB voted to keep Europe’s main interest rate steady at 0.75 per cent, while the deposit facility rate remains at 0 per cent and the marginal lending facility rate at 1.5 per cent.
Lack of growth
According to Mr Draghi, given the lack of growth in the real economy, “there wasn’t any reason to change the outlook for price stability. That’s why our discussion has been unanimous”, he said, adding that “risks to inflation over the medium term are seen as broadly balanced”.
Looking at the broader economy, Mr Draghi highlighted areas where there have been improvements. “Bond yields and country CDSs are much lower. Stock markets have increased. Volatility is at a historical minimum. The deposits in peripheral banks have gone up, Target 2 balances have gone down. All in all we have signs that fragmentation is being gradually repaired,” he said, but added that these improvements have not yet trickled down. “The real economy continues to be weak,” he said, adding that “the economic weakness in the euro area is expected to extend into 2013”.
Mr Draghi said declining bond yields were resulting in tail risk being removed, leading to an improvement in financial market conditions and stabilisation. The Bank of England also yesterday voted to keep its its benchmark interest rate unchanged, at a record low of 0.5 per cent.
Separately, ratings agency Standard and Poor’s yesterday said 2013 could be a decisive year in determining whether the euro zone can emerge from its sovereign debt troubles. The agency said 2013 could mark the start of the region sustainably overcoming the market volatility and fragmentation that has affected it over the past few years.
Investor confidence
However, it warned investor confidence will only return if member states continue to make progress in rebalancing their economies, through stabilising public debt and by reducing external deficits. “Achieving this will take a disciplined and transparent response from policymakers both at national and European levels.
“Safeguards to the social contract may also be necessary to assist in the cohesion of those member states suffering from high unemployment, excessive private leverage, and stagnating or falling living standards,” SP credit analyst Moritz Kraemer said. While the agency noted that European leaders “have laid, or at least announced, much of the groundwork for the euro zone to emerge from its lingering crisis”, it said success in reversing credit trends will depend on national and pan-European policymakers’ responses to continuing economic, political, and social risks.
