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Weak economic recovery sees ECB keep rates on hold

The Sydney News.Net Wednesday 2nd October, 2013

FRANKFURT - The European Central Bank Wednesday left interest rates unchanged with the central bank president Mario Draghi warning that "risks surrounding the economic outlook for the euro area continue to be on the downside".


ECB in a statement said "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 0.50%, 1.00% and 0.00% respectively"

At a press conference, Draghi later stated, "Developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions. Other downside risks include higher commodity prices in the context of renewed geopolitical tensions, weaker than expected global demand, and slow or insufficient implementation of structural reforms in euro area countries."

ECB head stated that the underlying price pressures in the euro area are expected to remain subdued over the medium term, with inflation expectations for the euro area expected to remain anchored below, but close to 2 percent over the medium term.

Considering that the real GDP growth in the second quarter was positive, after six quarters of negative output growth, Draghi pointed out that the pointers up to September confirm the expected gradual improvement in economic activity from low levels.

"Our monetary policy stance continues to be geared towards maintaining the degree of monetary accommodation warranted by the outlook for price stability and promoting stable money market conditions. It thereby provides support to a gradual recovery in economic activity," Draghi stated..

In line with the forward guidance provided in July, ECB head stated that the "monetary policy stance will remain accommodative for as long as necessary" meaning that the key ECB interest rates are expected to remain at present or lower levels for an extended period of time.

Draghi's comments that the ECB would consider all measures to maintain eurozone stability boosted the euro, which rose 0.6% against the dollar to $1.36, to a one-year high.

The currency was also bolstered by news that Italian Prime Minister Enrico Letta had won a Senate confidence vote after a last-minute U-turn in his favour by former prime minister Silvio Berlusconi.

Stating that further support for the banking sector could not be ruled out, Draghi

said that bank lending to businesses was still weak, because of banks' reluctance to lend and also because of a reluctance by business to expand. "Credit flows are weak, I would say, very weak," Draghi said.

There has been speculation that the ECB might offer another round of cheap, long-term loans to banks to keep the cost of credit down.

For fostering the economic recovery and creating jobs in a situation of price stability, Draghi stated that "the three pillars are national economic policies should continue their reform actions, the ECB should continue keeping price stability, and the economic governance at the euro area level should continue making progress."

Referring to this week's US government shutdown, ECB chief stated that it would not help the global economic recovery if the crisis was "protracted". But he added: "The impression is that it won't be."

When asked if he thought the US could default on some of its debt obligations in coming weeks, he said: "I don't".

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