At its monthly policy meeting — held in Paris instead of the central bank’s usual venue in Frankfurt — the ECB’s governing council voted to keep the bank’s key “refi” refinancing rate steady at an all-time low of 0.50 percent. .
At his traditional post-meeting news conference, Bank President Mario Draghi said he “expects the key ECB interest rates to remain at present or lower levels for an extended period of time.”
This was based on the assumption that the inflation outlook will remain subdued, the ECB chief said.
Nevertheless, there has been concern that rising money market rates may choke off the still very tentative economic recovery in the 17 countries that share the euro.
“The risks surrounding the economic outlook for the euro area continue to be on the downside,” Draghi said.
“Developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions.”
Money market rates in Europe have indeed been rising recently amid talk about a so-called “tapering” or winding down of anti-crisis measures by the US Federal Reserve on the other side of the Atlantic.
Draghi said the ECB remained “particularly attentive” to such developments.
And it was “ready to consider all available instruments” to curb an unwarranted tightening, he said.
These included a so-called LTRO or long-term refinancing operation with which the ECB already flooded eurozone banks with more than 1.0 trillion euros ($1.35 trillion) in cash at the end of 2011 and the beginning of 2012 in a bid to avert a potentially disastrous credit crunch.
However, ECB watchers are still guessing when exactly such a move will be announced.
“We see a chance that the ECB will announce new measures towards the end of the year,” when the previous three-year LTROs will have only one year left to maturity, said Berenberg Bank economist Christian Schulz.
He suggested the ECB could provide new liquidity via another LTRO.
But it could “also just be an extension of the full allotment scheme beyond the current expiry date of end July,” he said.
Marie Diron of EY Eurozone Forecast said a new LTRO could help ease uncertainty as the ECB prepares its review of banks’ balance sheets.
“However, as Draghi stressed, providing liquidity should not be seen as a substitute for adequate capital positions,” the expert said.
“The eurozone’s banking sector needs stronger balance sheets to ensure robust growth in the medium-term.”
IHS Global Insight economist Howard Archer said he had “little doubt that the ECB will undertake a new LTRO.
“The only question seems to be when exactly it will do this and what time span will it be for,” Archer said.
He suggested the ECB could launch another three-year LTRO before the end of this year, “perhaps just after the Fed starts to taper which we currently suspect will happen in December.”
ABN Amro economist Nick Kounis said a new LTRO “could temper any expectation that interbank rates might be driven up by declining liquidity, even in the absence of policy rate hikes.”
Turning to the current US government shutdown, Draghi said it was not yet a threat to recovery, but could prove to be one if the political gridlock lasts.
“The US budget shutdown is a risk if protracted. At present time, the impression one has is that it will not be so,” Draghi said.
But if it is, it would be “a risk for the US and the world recovery”.
In Washington, the US government has shutdown for the first time in 17 years as Republicans and Democrats remain at loggerheads over the budget, with Democrats refusing to give in to Republican demands for cuts in President Barack Obama’s flagship health law.
So far, investors seem unruffled by the crisis.
On the foreign exchange markets on Wednesday, the euro jumped on news that Italy’s Silvio Berlusconi has abandoned his bid to topple the government.
The single currency hit an eight month high of $1.3595 from $1.3527 late in New York on Tuesday, and even briefly broke the $1.36 mark.