ECB discusses rate cut but decides against it
The European Central Bank held its main refi rate unchanged despite a fall in inflation and weakening growth in the eurozone
The central banks refinancing rate remained at a record low 0.75%, disappointing some in the market who had expected the bank to take some easing measures to fight economic weakness as inflation fell.
There was discussion [of a rate cut]," ECB President Mario Draghi said in his news conference after the decision. "The prevailing consensus was to leave the rates unchanged.
The central bank also adjusted downwards its projections for growth, with eurozone gross domestic product now seen shrinking by 0.9% this year from a previous forecast of a 0.3% fall.
The downward revision is due to a carry-over from a weak fourth quarter last year, Draghi said. He added that the central banks policy stance would remain accommodative but that it was essential that governments in the euro area carry out necessary fiscal and structural reforms to strengthen the growth outlook.
The euro-area wide general government deficit is expected to have declined to 3.5% of GDP in 2012 and is projected to be reduced to 2.8% of GDP this year, he said.
Governments should build on this progress with a view to restoring confidence in public finances, Draghi added.
It is of particular importance to address the current, high long-term and youth unemployment by addressing labor market reforms, the ECB president also said.
Inflation in the eurozone dropped to 1.8% in February from Januarys 2%, matching the ECBs target of maintaining inflation below but close to 2%.
Unemployment inched up to 11.9% in January from Decembers 11.8% in the single currency area.
Analysts have said that inflation should no longer be a concern for the ECB as global prices are likely to decrease due to falls in commodity prices.The single currency areas recession is likely to hit global demand, analysts have warned, adding that the single currency's appreciation was putting even more downwards pressure on the economy.
EURO EXCHANGE RATE
On the euros exchange rate, Draghi reminded journalists of the recent G20 communiqué on currencies, which mentions that members would avoid persistent exchange rate misalignments.
The exchange rate is not a policy target for us, Draghi said, reiterating his stance that the ECB will continue to look at it but stick to the stance adopted by the G20.
He said the central bank would look at the exchange rate if sustained euro appreciation had the potential to alter the risk assessment on inflation.
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Some economists have long been warning that deflation, not inflation was the main danger for the eurozone.
If we mean by deflation a generalized fall in prices across sectors and a self-feeding fall in prices, we have not seen that, Draghi said.There have been lower prices in some countries and higher prices in others and this is part of the rebalancing in the euro area and overall it is a positive sign, he added.
Continuing to reduce fragmentation in credit markets in the eurozone and strengthening the resilience of banks are essential to ensure adequate transmission of monetary policy, Draghi said.
Decisive steps for establishing an integrated financial framework will help to accomplish this objective, he said.
The future Single Supervisory Mechanism (SSM) is one of the main building blocks, together with a Single Resolution Mechanism (SRM). Both are crucial elements for moving towards re-integrating the banking system.- Follow us on twitter @emrgingmarkets