Published February 06, 2014
Defying calls to ward off dangerously low inflation, the European Central Bank on Thursday declined to offer more stimulus to the continent’s struggling economy, keeping current interest rates in place.
The ECB at its February policy meeting held its key refinancing rate unchanged at 0.25% in its and its deposit rate at zero. The central bank also offered no provisions to increase liquidity in European markets.
A cut to the primary lending rate had been widely forecast by European analysts as the Eurozone consumer price inflation dropped to 0.7% in January. The central bank cut rates last November after euro zone inflation fell to 0.7% in October.
The turmoil in emerging markets, blamed in part on the U.S. Federal Reserve pulling back on stimulus, had also put pressure on Europe to ease monetary policy.
At a press conference following the announcement, ECB President Mario Draghi insisted Europe was not facing deflation but rather a period of prolonged low inflation.
Deflation occurs when demand for goods falls, pressured lower by weak labor markets and lack of consumer confidence. Tepid demand cuts across the broader economy by lowering production and scaling back companies plans for expansion.
Draghi reiterated that further actions could be initiated if the ECB believes the moves are warranted. “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,” Draghi said.
In a statement that accompanied the announcement to keep interest rates at current levels, the ECB said it is monitoring developments in emerging markets closely “and are ready to consider all available instruments.”
“Overall, we remain firmly determined to maintain the high degree of monetary accommodation and to take further decisive action if required,” the statement said.
Analysts took Draghi at his word, suggesting the ECB will keep its options open and make a move in March if the European recovery continues to struggle.
“While it is far from guaranteed, there is clearly a very real chance the ECB could end up trimming its refinancing rate from 0.25% to 0.10-0.15% in March. It is also possible that the ECB will eventually go down the negative deposit interest rate route, although we suspect the Governing Council would prefer not to and will only do so if inflation falls appreciably further,” said economists at IHS Global Insight in a note to clients.