ECB holds rates as economic uncertainty grows

Feb 9, 2012, 16:54 GMT

Frankfurt - The president of the European Central Bank (ECB), Mario Draghi, on Thursday ruled out any immediate change in interest rates while remaining tight lipped on the bank's plans for its Greek debt holdings.

'We frankly did not discuss any prospective or current change in interest rates,' Draghi told a press conference following a meeting of the ECB's 23-head rate-setting council.

In his comments, the ECB chief painted a downbeat picture of the economic outlook facing the 17-member eurozone and warned about the threat of tight credit conditions in parts of the currency bloc.

'Uncertainty is high (with) the global economy, sovereign (debt market) tensions and the credit markets,' said the ECB chief after what he described as a very weak fourth quarter.

His comments came after the ECB decided to keep interest rates steady at their historic low of 1 per cent for the second consecutive month.

But while the ECB's chief was in Frankfurt setting out the results of the bank's governing council's meeting, Greek lawmakers in Athens finally hammered out a new debt-and-budget deal aimed at releasing 130 billion euros (172 billion dollars) of bailout funds to help it escape the threat of default.

Announcing the news out of Athens, Draghi expressed confidence that Greece was now on course to finding a solution to its debt crisis, which first emerged about 30 months ago.

But he refused to be drawn on the ECB's plans for its estimated 40-billion-euros worth of holdings in Greek bonds, including whether it would accept a writedown on the debt.

'I'm quite confident that all the pieces will fall into their proper places,' he said but added he wanted to wait until the meeting of eurogroup finance ministers and officials set to take place later Thursday before commenting on Greece.

'The most important thing about Greece is this agreement,' he said referring to the much-delayed deal reached in Athens.

Draghi went on tell reporters, there was 'no plan B' for Greece. 'Having a Plan B means you're defeated already.'

It is now just over a 100 days since the 64-year-old former Italian central chief took over as head of the ECB.

Since then, Draghi has sharpened the ECB message to the markets, while at the same time launching a somewhat more robust monetary policy, analysts say.

This includes delivering two 25 basis points rate cuts to underpin economic growth and announcing plans in December to pump a record 489 billion euros worth of liquidity in the eurozone's financial system.

Draghi said bank conditions had tightened in several countries towards the end of the year.

But he said that the series of moves unveiled by the ECB to pump liquidity into the eurozone financial system were 'still unfolding.'

He did, however, note that stress in the financial markets had diminished in response to the ECB's monetary policy measures, as well as thanks to the steps taken by eurozone towards greater budget discipline.

Many analysts are expecting the ECB to trim rates again by the middle of the year as inflationary pressures across the eurozone ease.

Annual inflation in the eurozone held steady in January at 2.7 per cent, which is well above the ECB 2-per-cent limit.

But Draghi again said that he expects consumer prices to fall below 2 per cent in the coming months amid a brittle economic outlook.