ECB dismisses talk of 'exit strategy', keeps rate on hold
(FRANKFURT) - The European Central Bank on Wednesday ruled out winding down its anti-crisis measures for now and kept its key interest rates at record lows amid fresh signs the eurozone is in recession.
"Any 'exit strategy' talking for the time being is premature," ECB chief Mario Draghi told a news conference when asked whether the ECB was considering hanging up its firefighter's helmet in the eurozone's long-running sovereign debt crisis.
Ever since the outbreak of the crisis, the ECB has taken a series of what it calls "non-standard" measures to prevent a collapse of the single currency.
On top of conventional monetary policy moves such as cutting interest rates to historic lows, it has also bought up the bonds of debt-stricken countries.
And most recently, it pumped more than 1.0 trillion euros ($1.3 trillion) into the banking system via two so-called long-term refinancing operations (LTROs) in a bid to avert a dangerous credit squeeze.
At its regular monthly policy meeting -- brought forward by a day owing to the Easter holidays -- the bank voted to keep interest rates at 1.0 percent for the fifth month in a row.
Draghi insisted it was "important to keep in mind that all our non-standard monetary policy measures are temporary in nature and that all the necessary tools are available" to fight inflation if it got out of hand.
That was a signal that the ECB would not hesitate to raise rates if it felt that all the new liquidity in the system posed an inflationary danger. The bank aims to keep inflation at close to, but below two percent.
Nevertheless, there were "downside risks" to economic growth in the 17 countries that share the euro and the outlook for inflation was "broadly balanced," Draghi said.
And there could be no talk of exiting the exceptional policy measures for now, especially while their impact was still being assessed, he argued.
The liquidity moves had succeeded in restoring some calm to the financial markets, he insisted, saying they "have relieved funding pressures and avoided a major credit crunch."
Nevertheless, they were "powerful and complex measures (and) ... we still have to look more" into their impact, Draghi said.
Furthermore, "the full supportive impact of the non-standard measures will need time to unfold and to have a positive effect on growth of loans when demand recovers," he continued.
The ECB measures would not, however, relieve governments of their responsibility of getting to the root of the crisis and putting their finances on a sound and sustainable footing, Draghi insisted.
ECB watchers predicted the central bank would keep its interest rates at their current levels for the foreseeable future.
"Barring a renewed major downturn in eurozone economic activity, we now doubt that the ECB will trim interest rates further," said IHS Global Insight economist Howard Archer.
While he felt there was a compelling case for lower interest rates given likely eurozone economic contraction through the first half of 2012, "we suspect that the ECB will instead keep its key interest rate at 1.00 percent for an extended period -- very possibly through to 2014," he said.
Tom Rogers, senior economic adviser at Ernst & Young, also felt that "ideally the ECB would be able to provide further support to activity by cutting interest rates."
But inflation was falling less rapidly than the ECB would like, thanks to higher energy costs.
"As such it seems unlikely the ECB will be able to cut rates until the weakness of the real economy has started to feed through into wages and domestically generated inflation, or energy prices ease," Rogers said.
Commerzbank chief economist Joerg Kraemer said the ECB may have to launch a new round of LTROs as the success of the three-year tenders so far had lowered the pressure on peripheral countries to implement reforms.
But Capital Economics economist Jonathan Loynes found Draghi "distinctly non-committal with regard to the possibility of further unconventional policy support."
Draghi had "gone out of his way to underline the limits to the ECB's responsibilities," Loynes said.
"In short, the ECB has done its job by propping up the banks. It is now up to governments to address the bigger economic and fiscal problems facing the region," he said.
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