ECB leaves key rate at record low of 0.75 percent

FRANKFURT, Germany (AP) ? The European Central Bank has left its benchmark interest rate unchanged at a record low of 0.75 percent, holding off on further stimulus even though Europe's economy remains stuck in a recession.

The decision came at a meeting of the bank's 23-member governing council at its headquarters in Frankfurt, Germany.

Markets are now waiting to hear ECB head Mario Draghi's outlook for the economy of the 17 European Union countries that use the euro currency.

Draghi is also expected to underline the need for indebted countries such as Italy to be ready to meet tough conditions if they want to use the ECB's help in lowering their borrowing costs.

The ECB's bond purchase safety net announced Sept. 6 gets much of the credit for the recent easing of market turmoil in the eurozone. The bank would purchase unlimited amounts of a country's bonds from investors, lowering that government's borrowing costs. The mere existence of the program has already lowered borrowing costs ? even though no bonds have been bought.

The catch is that any government that wants the help has to agree to take steps to reduce debt through pro-growth reforms and by controlling deficits.

However Italy's inconclusive elections last week raised the fear there might not be a government that would qualify for ECB assistance.

One concern is that Italy might wind up with a government that rejects the conditions for such help ? such as keeping deficits down and carrying out reforms to make the country more business-friendly. In that case, the country might lose the protection that comes from the ECB offer. So far, that has not happened and Italy's borrowing costs have risen only moderately.

Mentioning the conditions of the program would be one way that Draghi could urge Italy's political leaders not to backtrack on the cuts and reforms carried out by Prime Minister Mario Monti during his 15 months in office.

The ECB is also slated to issue new growth and inflation projections for this year and next. Draghi has said the ECB expects the eurozone economy to shrink 0.3 percent this year and begin a gradual recovery only later in the year, while inflation is expected to ease to 1.6 percent for all of this year. Some recent indicators of future economic activity, such as Germany's Ifo index of business optimism, have pointed up in recent weeks. But unemployment remains at 11.9 percent, the highest since the euro was introduced in 1999.

Unlike the U.S. Federal Reserve, the ECB's mandate is to focus on controlling inflation first, and only then think about reducing unemployment. However, the weak economy could in theory justify a rate cut. And inflation at an annual 1.8 percent is low enough that a cut would not risk more inflation. But ECB officials have said that rates are already low enough to stimulate the economy.

Draghi has said that the bank's main focus is to see that its low benchmark rates actually are passed on when companies and individual borrow. That has not always been the case in the heavily indebted countries where many banks have troubled finances. The ECB has tackled that problem with cheap loans to banks to shore up their finances. The bond purchase offer also helps because fears of government default can undermine banks in those countries, which often hold government bonds.

Source: http://news.yahoo.com/ecb-leaves-key-rate-record-low-0-75-125033410--finance.html

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