Friday 30 January 2015

Debt Crisis: ECB’s Mario Draghi leaves door open to interest rate cut

Eva Kuehnen

Published 08/11/2012 | 11:02

European Central Bank (ECB) President Mario Draghi speaks during a news conference in Frankfurt, November 8, 2012. The European Central Bank held its main interest rate at 0.75 percent on Thursday, deferring any cut in borrowing costs while it assesses the extent of the euro zone's economic downturn and waits for a cue to use its new bond-purchase programme. REUTERS/Lisi Niesner (GERMANY - Tags: BUSINESS)

THE eurozone economy shows little sign of recovering before the year-end despite easing financial market conditions, European Central Bank President Mario Draghi said today, leaving open the possibility of an interest rate cut in the months ahead.

But after keeping rates on hold on Thursday, Draghi said the ECB cannot do much more to help Greece with its debt burden and gave Spain none of the assurance it wants that ECB bond buying will lower its borrowing costs.

"The ECB is by and large done," Draghi told his monthly news conference when asked what the bank could do for Greece.

The euro zone is grappling to find a formula to make Greek debt sustainable, with Germany and the International Monetary Fund at odds over the need for governments and the ECB to take a "haircut" on Greek bonds they hold to make the numbers add up.

The ECB agreed earlier this year to hand over to euro zone governments profits on its Greek bonds but has refused to take a hit on the value of the paper, saying that would be "monetary financing" which it is prohibited from doing.

The ECB held its main rate at 0.75pc, deferring any cut while it waits for a cue to use its new bond-purchase plan. That wait may be prolonged after Spain completed its 2012 funding at affordable rates on capital markets on Thursday.

A Reuters poll had given an 80pc chance the ECB would hold its main rate, but most of the 73 analysts polled expect it will be cut to a new record low of 0.5pc within the next few months.

Draghi said ECB monetary policy is "very accommodative". He declined to comment when asked whether markets were right to expect a rate cut next month and said the policymaking Governing Council had not discussed what it would do next year.

Economist Howard Archer at IHS Global Insight said: "Draghi appeared to ease open the door to a cut in interest rates over the coming months and potentially as soon as December."

Not everyone expects a cut that soon.

"Our sense is that the ECB is firmly on hold," said JP Morgan economist Greg Fuzesi, though he added: "Next year, the ECB will act if growth disappoints more fundamentally."

Describing "a picture of weaker economies" in the euro zone, Draghi said this would influence new ECB economic forecasts due next month. Inflation would remain above the ECB's target for the rest of the year, before falling below 2pc in 2013.

"We certainly continue monitoring economic activity and we stand ready to act," he said.

"We stand ready to act with OMT (bond-purchase plan) once the prerequisites are in place. We also stand ready to act with the rest of standard, normal monetary policy instruments."

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