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Eurozone interest rates on hold as ECB adopts wait-and-see mode

Apr 4, 2012, 11:51 GMT

Frankfurt - The European Central Bank (ECB) left interest rates unchanged at an historic low of 1 per cent Wednesday as it attempted to balance stubbornly high inflation with a weak economic growth outlook.

The announcement of the ECB's 23-head rate-setting council was in line with analysts' forecast.

As a result, with the ECB in a wait-and-see mode, markets will be focused on ECB chief Mario Draghi's press conference, set for later Wednesday.

In particular, markets will be following Draghi's comments for indications as to whether the Frankfurt-based bank is making any preparations to draw down the 1 trillion euros (1.33 trillion dollars) of cheap loans it has rolled out since December.

This follows calls from some senior ECB officials for the bank to begin piecing together an exit strategy for winding back the funds the bank has pumped into the 17-member eurozone's financial system.

However, Draghi is not expected to rule out the possibility of the ECB launching further emergency steps to shore up economic confidence in the currency bloc.

This follows concerns that the debt crisis might flare up again as heavily indebted members of the eurozone struggle to cut high debt and deficit levels amid a sharp downturn in economic growth.

In his comments to reporters, the ECB chief is also likely to step up the pressure on eurozone governments to do their bit in shoring up investor confidence in the eurozone by pressing on with moves aimed at cutting back high debt and deficit levels.

In the meantime, the ECB faces a difficult balancing act between bolstering the eurozone's weak economy and bringing inflation back down to the bank's 2-per-cent annual target.

The ECB expects the currency bloc to contract by 0.1 per cent this year before expanding by 1 per cent in 2013, according to staff projections set out by Draghi at his press conference four weeks ago. The eurozone grew by 1.3 per cent in 2011.

But since then, data and indicators have continued to paint a somewhat downbeat picture of the region's economic prospects.

The Markit research group said Wednesday its composite purchasing managers index for the eurozone, which gauges the mood among about 2,000 companies, edged down to a three-month low of 49.1 points in March. A reading below 50 signals contraction.

This week's ECB meeting was also held amid signs that inflation is declining at a slower pace than both analysts and the ECB had forecast at the start of the year.

Annual inflation in the eurozone edged down less than predicted - to 2.6 per cent in March from 2.7 per cent in February amid a spike in energy costs - preliminary data released Friday showed. This left consumer prices uncomfortably above the ECB's 2-per-cent ceiling.

Four weeks ago, the ECB revised up its inflation forecasts for 2012. It now expects annual consumer prices will come in at 2.4 per cent this year, before easing to 1.6 per cent in 2013.

Since taking over as ECB chief at the start of November, Draghi has delivered two 25-basis-point cuts in borrowing costs - one in November and the other in December.

However, the prospects of paltry economic growth and forecasts of dwindling inflationary pressures means that many economists believe interest rates in the eurozone could be on hold, possibly through to 2014.

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