European Central Bank President Mario Draghi said the bank has averted a serious credit shortage and there are signs the economy is stabilizing, signaling policy makers may resist cutting interest rates further for now.
“According to some recent survey indicators, there are tentative signs of stabilization of economic activity at low levels,” Draghi said at a press conference in Frankfurt today after the ECB kept its benchmark interest rate at 1 percent following two straight reductions. While the debt crisis poses “substantial downside risks” to the economic outlook and the ECB remains “ready to act,” Draghi gave no indication that another rate cut is imminent.
With the euro area on the brink of a second recession in three years, some signs of economic resilience have given the ECB room to assess the impact of its stimulus measures to date, which include lending a record amount of cash to banks. Draghi said those loans prevented a “serious” credit contraction. He also noted that borrowing costs for governments across the 17- nation region have dropped.
The euro climbed to $1.2790 at 4.40 p.m. in Frankfurt from $1.2739 before Draghi’s press conference started.
“Draghi has been non-committal about policy going forward and the market had been anticipating that rates are going to be cut further,” said Steve Barrow, head of Group of 10 currency strategy at Standard Bank Plc in London. “He’s also spoken about tentative signs of stabilization, and maybe those two factors have helped the euro a little bit.”
Asked if the ECB is open to cutting rates further, Draghi said it depends on the inflation outlook. He indicated rates will remain low for an extended period.
“The monetary stance is and will remain accommodative,” Draghi said. “Uncertainty is very high. We will monitor all developments and stand ready to act.”
The Bank of England also refrained from announcing new stimulus today, maintaining its 275 billion-pound ($422 billion) bond-purchase target and holding its key rate at 0.5 percent, as the U.K. economy shows some signs of robustness.
Draghi’s remarks on signs of economic stabilization were “a recognition that we could have seen the trough in the fourth quarter,” said Tobias Blattner, a former ECB economist now working for Daiwa Capital Markets Europe in London. “If that is the case, they are unlikely to cut rates again. However, he left the door open for further rate cuts if needed, and if the data deteriorates rapidly next month then I don’t think they’ll hesitate.”
Signs of Stabilization
Data this week showed gains in German exports and French business confidence. Europe’s Stoxx 600 Index has gained 2 percent this year and is up 16 percent from its 2011 low on Sept. 22. The euro’s 10 percent drop against the dollar since late October and an easing of financial conditions may also provide support as leaders battle to restore investor faith in their region’s bond markets.
Italy sold 12 billion euros ($15 billion) of Treasury bills today, meeting its target. The rate on the one-year bills plunged to 2.735 percent from 5.952 percent at the last auction of similar-maturity securities on Dec. 12.
Spain sold 9.98 billion euros of bonds maturing in 2015 and 2016, twice the maximum target. The yield on a new benchmark bond, which matures in July 2015, was 3.384 percent, compared with 5.187 percent when Spain sold notes maturing in April 2015 at an auction in December.
The euro area may still struggle to stave off recession. German gross domestic product probably dropped 0.25 percent in the fourth quarter of last year from the third, the Federal Statistics Office said yesterday. Some economists predict another contraction this quarter, putting Europe’s largest economy into recession.
The ECB last month cut its 2012 growth forecast for the euro region to 0.3 percent from 1.3 percent.
The new estimate “looks optimistic,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. “We think that further cuts in the central bank’s refinancing rate are likely going forward, taking it to a low of 0.5 percent.”
Draghi said while inflation will remain elevated for several months, it will then fall below the ECB’s 2 percent ceiling.
The ECB last month loaned financial institutions an unprecedented 489 billion euros for three years and widened the pool of collateral they can use to obtain the funds. It will offer a second batch of three-year loans in February.
“We do think that at least this decision has prevented a credit contraction that would have been more serious, much more serious,” Draghi said.
He downplayed the surge in overnight deposits at the ECB to a record 486 billion euros this week, which suggests banks are parking the excess cash rather than lending it on.
“By and large, the banks that have borrowed the money from the ECB are not the same that are re-depositing the money with the ECB,” Draghi said.
The median forecast in a survey of 21 economists before today’s decision was for the ECB to keep its key rate at 1 percent through mid 2013.
“Unless there is marked deterioration in economic activity and credit availability, it does not seem very likely that the ECB will cut rates in February,” said Elga Bartsch, chief European economist at Morgan Stanley in London. “But then we are expecting the ECB to revise down its forecasts significantly in March.”
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