Draghi Sees Economy Recovering as ECB Rates Left on Hold

European Central Bank President Mario Draghi said the euro-area economy will return to growth by the end of the year, handing policy makers a reason to hold back fresh stimulus.

“Euro-area economic activity should stabilize and recover in the course of the year, albeit at a subdued pace,” Draghi told reporters in Frankfurt today. “We will monitor very closely all incoming developments and we stand ready to act.”

Draghi spoke after the ECB’s Governing Council left its main refinancing rate at 0.5 percent after reducing it by a quarter point last month. The decision was predicted by 57 of the 59 economists in a Bloomberg News survey. The euro climbed to a four-week high against the dollar and Germany’s two-year note yield rose to the highest level since February.

An improvement in sentiment is giving Draghi time to consider a menu of further measures that the ECB may deploy to aid the 17-nation economy, now in its longest recession since the euro began trading in 1999. Among the options he cited: Cutting the so-called deposit rate into negative territory, lending more money to banks, easing collateral rules, reviving the market for asset-backed securities and providing investors with greater guidance on how long borrowing costs will stay low.

“We have a range of different instruments,” said Draghi. Economic data since the ECB’s meeting last month “were not enough to grant immediate action,” he said.

Deposit Rate

The ECB held its deposit rate at zero and its marginal lending rate at 1 percent. Draghi said the consensus of officials had been not to act, given the recent data.

The euro rose as high as $1.3175 from $1.3115 before Draghi started speaking. The yield on Germany’s two-year government bond rose about 4 basis points to 0.138 percent.

“There is no smoking gun here for a move any time soon,” Harvinder Sian, a senior fixed income strategist at Royal Bank of Scotland Group Plc in London, said in a note to clients. “Data flow is the most important signal for the ECB and the markets.”

As the ECB revamped its economic outlook, Draghi called inflation risks “broadly balanced” and noted “downside risks” for growth.

The bank cut its forecast for the euro area’s economy to show contraction of 0.6 percent this year from an estimate of minus 0.5 percent made in March. Officials raised their projection for next year to 1.1 percent from 1 percent. The ECB cut its 2013 inflation forecast to 1.4 percent from 1.6 percent. The 2014 estimate was unchanged at 1.3 percent.

Brightening Outlook

Economic indicators have improved since the first quarter. A gauge of euro-area manufacturing output rose more than initially estimated in May, economic sentiment as measured by the European Commission and Sentix investor confidence both rose after a slump in April, while consumer morale improved for a sixth month.

Elsewhere, the Bank of England today kept its bond-purchase target at 375 billion pounds ($580 billion) and maintained its key rate at 0.5 percent.

Draghi described the untapped Outright Monetary Transactions bond-buying program as “the most successful monetary policy measure” of recent times, crediting it with calming financial markets and defending it ahead of a review by Germany’s constitutional court.

Split ‘Dramatization’

He played down differences within the ECB’s 23-member council, saying reports of splits over the direction of policy were a “dramatization.”

“You have different views in all central banks,” he said. “In a period of uncertainty, there are obviously a variety of opinions.”

While Draghi has previously said the ECB is studying ways to breathe life into the ABS market as a way of boosting the economy, he said today such a plan was not something for the short-term.

On the topic of bank supervision, Draghi said the ECB wants governments to make an explicit commitment to backstop banks. He said it’s essential to strengthen the resilience of the region’s lenders and repeated that his staff are currently reviewing the health of balance sheets.

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