The European Central Bank’s key refinancing rate remained at its record low 0.75% despite some analysts’ predictions that it would ease monetary policy further, just as yields on Spanish 10-year bonds fell below 5% for the first time in 10 months.
“At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.75%, 1.50% and 0.00% respectively,” the central bank said in a statement.
The decision was expected, with some analysts saying that the easing in financial markets tensions since the autumn provided the bank with confidence that the existing policy was working.
“The decision was unanimous. If you look at the overall landscape... you look at what’s happened in the last 6 months, you will see a significant improvement in financial market conditions,” ECB President Mario Draghi said in his monthly news conference.
“Bond yields and market CDS are significantly lower. Stock markets have increased. Volatility is lower. Net redemptions are one-fifth what they were in September. We’ve seen capital inflows in the euro area.”
“The ECB balance sheet size, which often is indicated as a source of risk, continues to shrink.”
“We have signs that fragmentation is being repaired. But all this has not found its way into the real economy yet.”
RISKS 'ON THE DOWNSIDE'
The risks for the eurozone economic outlook “remain on the downside” and are mainly related to the slow implementation of structural reforms, geopolitical issues and imbalanced in major industrialized countries, Draghi said.
“These factors have the potential to dampen sentiment for longer than currently assumed and delay further the recovery of private investment, employment and consumption,” he added.
Jonathan Loynes, chief European economist for Capital Economics, said that "if the news on the economy remains poor – and market concerns over Spain and other peripheral economies resurface – Draghi’s pledge to do whatever it takes to preserve the euro may soon be tested.”
Record high unemployment in the eurozone and a contraction of credit in November had made some analysts think that the central bank will be forced to act.
Draghi welcomed the fact that risks have receded.
“We are pleased that tail risks have been removed and this has led to a beginning of confidence return in financial markets,” he said, but called on eurozone policy makers to press ahead with structural reforms to return the economies to competitiveness and growth.
“Other economic policy areas will need to make a contribution to ensure... an improvement in the outlook of growth,” he said. “Eventually this is what matter for imbalances in the euro area: structural adjustment.”
Inflation is expected to decline further towards below 2% this year from 2.2% in December, Draghi said.
“Price developments should remain in line with price stability over the medium term,” he said.
The health of commercial banks had improved substantially since the collapse of Lehman Brothers in 2008, he said.
“I think a lot of repairing has taken place since Lehman times. A lot of work was done, both in terms of de-levering untenable positions and in terms of raising capital. The work isn’t finishes, and it should continue, and that’s in the hands of national supervisors.”
He said the Basel III rules were not postponed but that there was an agreement to phase them in, which was “pretty normal.”