ECB Keeps Rates Unchanged 12/05 07:13
The European Central Bank left its key interest rate unchanged on Thursday,
even though the economic recovery has almost ground to a halt in the 17-country
FRANKFURT, Germany (AP) -- The European Central Bank left its key interest
rate unchanged on Thursday, even though the economic recovery has almost ground
to a halt in the 17-country eurozone.
The currency bloc's chief monetary authority left its benchmark rate at 0.25
percent at a meeting at its headquarters in Frankfurt, Germany. The ECB also
held off on other steps to stimulate the weak recovery, following a surprise
quarter-point cut at last month's meeting.
The refinancing rate determines what banks pay to borrow from the ECB and
influences borrowing costs for businesses and consumers. In theory, lower rates
let businesses borrow more easily so they can invest and create jobs.
But some banks are unwilling to lend at those low rates because they're
worried about the economy and focused on fixing their own finances. That blunts
the effect of the ECB's rate policy. Also, the refinancing rate is already so
low it cannot go much lower without hitting zero.
That has pushed the ECB to look at other ways to stimulate the economy.
Possibilities include giving cheap, long term loans to banks, at the condition
that the money is actually used for loans to businesses instead of hoarded in
investments such as government bonds.
The ECB could also push the deposit rate it pays banks from zero into
negative territory. That would in theory give banks an incentive to pull the
money out of the central bank's super-safe deposit facility and lend it.
A deposit rate cut, or a further cut in the refinancing rate to near zero or
to zero, might not help growth directly. But more rate cuts could help by a
different route, by lowering the euro's exchange rate. Lower rates reduce
investor demand for a currency by decreasing returns on fixed-income
A lower euro would help countries in the eurozone export more by making
their goods cheaper in other currencies.
In theory, ECB officials have said they could also start large-scale bond
purchases with newly-created money, as the U.S. Federal Reserve has done. That
could drive down longer-term interest rates. But the economy would have to be
so slack that it is threatened with deflation, a chronic fall in prices that
kills off consumer spending and business investment.