ECB keeps rates unchanged at 0.5 pct

  • Article by: DAVID McHUGH
  • Associated Press
  • September 5, 2013 - 10:45 AM

FRANKFURT, Germany — European Central Bank head Mario Draghi says the eurozone's economic recovery remains fragile and has a long way to go before the bank raises interest rates from their current record low.

The ECB Thursday kept its main interest rate unchanged at the record low of 0.5 percent. Recent figures show the 17 European Union member countries that use the euro are only slowly recovering from an 18-month recession.

Draghi told reporters Thursday after the monthly meeting of the ECB's governing council that the recovery — a modest 0.3 percent in the second quarter after six quarters of decline — was still too weak to warrant any change in policy.

"I am very, very cautious about the recovery," Draghi said. "I can't share enthusiasm. The shoots are very, very green."

This caution was also reflected in the ECB's adjustment of its growth forecast for the eurozone for this year to minus 0.4 percent, up from minus 0.6 percent. However, the ECB trimmed its forecast for next year by one-tenth of a point to 1.0 percent.

The ECB head was at pains to reinforce the bank's stance that it will keep rates at the current low level or even lower for an extended period until the recovery is on stronger footing. Lower rates can stimulate growth.

While the U.S. Federal Reserve is already talking about phasing out some stimulus efforts, the ECB is emphasizing that it is nowhere near that point.

Draghi said that a rate cut was talked about at the bank's monthly policy meeting and that some council members felt the recovery is "still too green to exclude this discussion."

Unemployment in the eurozone remains high at 12.1 percent and the region's businesses still aren't willing to risk more borrowing to expand.

Draghi has stressed the bank's low-rate stance in part because it seems not all financial market participants believe in the bank's stance.

While the ECB's benchmark, the rate at which it loans to private banks, hasn't changed, some money market and bond market rates that determine what banks and companies actually pay for money have risen. The ECB doesn't want to see that because it wants rates as low as possible to help the recovery.

Market rates have gone up because people are anticipating the Fed will reduce its bond-buying program aimed at lowering long-term rates, and because of speculation the European and global economies may recover faster than expected.

"The ECB was very cautious in its assessment of the economic outlook today, caution we think is warranted," Marie Diron, senior economic adviser to Ernst & Young, said in an emailed statement. She said the forecast growth of 1 percent next will "only be enough to stabilize unemployment at high levels."

Draghi also said the ECB would not agree to any forgiveness of the debt Greece owes on government bonds held by the ECB. European leaders have admitted that Greece may need more financial assistance even after two rounds of bailout loans from the other euro countries and the International Monetary Fund.

The ECB is one of Greece's creditors, but takes the stance that forgiving debt would violate the EU treaty's regulation that the central bank cannot finance governments.

"The answer is no," said Draghi.

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