VIENNA (dpa-AFX) - The European Central Bank left interest rates unchanged at the first rate-setting session of the year as it waits to assess the impact of the previous two rate cuts and the slew of unconventional measures undertaken to boost liquidity in its battle against the sovereign debt crisis.
The Governing Council under ECB President Mario Draghi maintained the main refinancing rate unchanged at 1 percent following its meeting in Frankfurt on Thursday. The decision was in line with economists' expectations.
The bank has never cut the rate below 1 percent. Last year, the central bank under former chief Jean-Claude Trichet hiked interest rates twice.
Reversing untimely tightening measures taken earlier in the year, Draghi slashed interest rates in November in his very first policy meeting as the ECB chief, only to follow it up with a reduction in the next session. Going forward, some economists expect the central bank to trim interest rates further during the first quarter given the weaker economic outlook and the lingering debt crisis.
In the December meeting, Draghi also announced steps to boost liquidity that included easing collateral rules, reduce the minimum reserve requirement and an offer of longer term loans to banks. In the first offering of three-year loans, the ECB allotted a record EUR 489 billion to banks. The bank is set to hold a second tender on February 29, 2012.
That said, the funds are apparently not reaching the wider economy as banks are parking the money back at the ECB instead of lending them. Overnight deposits at the central bank rose to a record EUR 486 billion on January 10.
Draghi is set to hold a the regular post-decision press conference at 8.30 am ET. 'No doubt Draghi will claim that bigger bond purchases have been rendered at least partly unnecessary by the ECB's continued provision of funds to commercial banks,' Capital Economics Chief European Economist Jonathan Loynes said ahead of the announcement.
'The key message from the January 12th meeting and subsequent press conference looks likely to be that the ECB is still not prepared to ride to the rescue of indebted euro-zone governments,' Loynes added.
Recent economic data have been slightly encouraging. Inflation slowed to 2.8 percent from 3 percent in December, but remains above the ECB's target of 'below, but close to 2 percent'.
The results of the Purchasing Managers' survey released last week indicated a slower than expected contraction in the euro area private sector during December. A measure of Eurozone investor confidence compiled by the think-tank Sentix rose in January after weakening for five consecutive months.
However, data including industrial production and economic sentiment has also confirmed that the 17-nation economy has entered recession. Retail sales figures for November were worse-than-expected, while the unemployment rate held steady at its highest level since June 1998.
Yesterday, the German statistical agency revealed that the economy grew 3 percent last year, slower than the 3.7 percent expansion in 2010. The annual figures suggested that the biggest eurozone economy shrunk nearly 0.25 percent in the final three months of 2011. In the December meeting, the ECB slashed its euro area growth forecast for 2012 to 0.3 percent from 1.3 percent.
Giving some respite, Spain and Italy held successful debt auctions earlier today signaling some improvement in investor sentiment. 'We suspect markets were reassured by the prompt response of the new centre-right government, which has advocated additional fiscal tightening measures and confirmed the 2012 budget deficit of 4.4% of GDP,' said IHS Global Insight economist Raj Badiani.
'However, Spain could still find itself under renewed pressure in coming quarters, however, with bond markets taking fright from the prospect of a relatively deep and prolonged recession,' the economist said. Badiani also cited the final cost of bailing out the heavily exposed banking sector as the biggest risk to Spain's sovereign debt sustainability.
Copyright RTT News/dpa-AFX