European Central Bank keeps rates unchanged, searches for ways to boost eurozone

FRANKFURT – The European Central Bank has cut its growth forecast for the troubled euro area this year, but said there were enough signs of improvement ahead that it did not need to cut interest rates further.

The decision to hold off and wait for the economy to gather steam underscores the lack of quick fixes the ECB and Europe’s institutions have to deal with region’s stubborn recession and problems with too much debt.

Bank President Mario Draghi said the economy of 17 European Union countries that use the euro would shrink 0.6 per cent this year compared with the previous forecast of a 0.5 per cent decline.

Draghi, however, stuck with his forecast that the eurozone would begin to see growth at the end of the year. He was also slightly more optimistic about 2014, forecasting 1.1 per cent growth, up from 1.0 per cent previously.

The ECB chief spoke Thursday at a news conference after the bank’s 23-member governing council chose to leave its key interest rate unchanged at a record low 0.5 per cent.

He said recent surveys of economic optimism had shown improvement and the economy “should stabilize and recover in the course of the year.”

Draghi added that that while some indicators, such as lending to companies, were downbeat, there were others, including business sentiment, which had improved. The consensus, after a “very rich discussion” on the governing council, was that there “wasn’t any directional change that would justify taking action at this time,” Draghi said.

After the eurozone crisis over too much debt broke in late 2009, the region’s governments slashed spending and raised taxes — either to meet conditions for bailout loans or to reassure jittery bond investors. But austerity has also inflicted severe economic pain. The eurozone’s economy shrank 0.2 per cent in the first three months of this year compared with the previous quarter, the sixth straight quarterly contraction. Unemployment is at 12.2 per cent, the highest since the euro was introduced in 1999.

Draghi said that the bank’s governing council had also discussed a wide range of measures that go beyond interest rates to help stimulate the eurozone’s economy. These so-called unconventional measures include charging banks to keep money at the ECB by lowering its deposit rate to below zero, looking at ways to use financial markets to increase lending for small businesses, and more central bank lending to banks.

But in the end, he said, “we see no reason to act on all these fronts. These are all measures we keep on the shelf.”

Analyst Robert Wood at Berenberg Bank in London wrote in a research note that “today’s ECB message will be of limited help for the big monetary problem in the eurozone right now; a small business credit crunch in the eurozone periphery.”

The ECB’s key challenge is to get credit flowing to companies, particularly to the small and medium-sized firms that are the backbone of the eurozone’s economy. The problem is that record low interest rates have not been passed on by the banks in the hardest hit parts of the eurozone.

So the ECB is looking at other measures such as encouraging banks to package and sell loans to small businesses, a process that would free up more money to lend. But that will take months to set up and bank officials have recently downplayed how much impact it could have.

EU officials are also working on ways to strengthen the banking system and set up a Europe-wide “banking union”. The ECB is soon expected to take on an additional role as the region’s central banking supervisor. The hope is that it will take a tougher line than national authorities on cleaning up banks whose troubles are clogging the flow of credit to companies. But those changes will only be implemented beginning next year and some parts have not yet been decided.

The ECB also lowered its inflation outlook for this year to an annual 1.4 per cent from 1.6 per cent previously. The inflation forecast for next year was unchanged at 1.3 per cent.

The inflation figures are below the bank’s goal of just under 2 per cent, meaning it has plenty of room to cut rates if it chooses to. Lower rates stimulate borrowing and growth, but can worsen inflation if done at the wrong time. For the moment, inflation concerns are minimal.

Draghi held open the door to a rate cut if things worsen, saying that the bank would “monitor very closely” how the economy is doing.