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European Central Bank Holds Fire Again

European Central Bank Holds Fire Again
4/4/2012 8:07 AM ET

The European Central Bank kept eurozone interest rates unchanged at a record low for the fourth month in a row on Wednesday as the region's economy is likely to have entered a recession in the first quarter amid lingering concerns over the sovereign debt crisis.

The Governing Council led by ECB President Mario Draghi decided to maintain the main refi rate at a record low 1 percent, following its meeting in Frankfurt. The rate on the marginal lending facility was held at 1.75 percent, while the deposit facility rate was kept at 0.25 percent.

The central bank had reduced the rate in November and December, reversing the two hikes undertaken earlier last year. The rate-setting session was held a day earlier than usual owing to the Easter holidays.

Draghi is set to hold the regular post-decision press conference at 8.30 am ET, when he is expected to reiterate that the onus is on the euro area governments to solve the debt crisis and restore investor confidence.

Analysts do not expect the ECB Chief to hint at exiting the unconventional policy measures despite policymakers led by the German Bundesbank raising concerns over ECB liquidity injections stoking inflation.

Eurozone credit growth to the private sector has virtually come to a standstill over the last two months, and hence, "any serious exit discussion is currently premature," ING Bank Senior Economist Carsten Brzeski said in a note earlier this week.

Meanwhile, Capital Economics Chief European Economist Jonathan Loynes expects Draghi to hint that the ECB is nearing the limit of what it is prepared to do and may soon start to think about how to exit some of its policy measures.

Recent economic data have not signaled any rebound in the 17-nation economy, but suggest the fragile situation is increasingly turning worse. Inflation remains well above the central bank's 'below, but close to 2 percent target'.

"High energy prices have even increased the risk of stagflation in the Eurozone, a worst-case scenario which should cause concern at the Eurotower in coming months," ING Bank's Brzeski said.

Record high unemployment has hurt spending as indicated by today's data that revealed a 0.1 percent fall in retail sales in February. Almost all confidence indicators, save the German Ifo, have declined.

Last week, the Organization for Economic Co-operation and Development said Germany, France and Italy together will shrink 0.4 percent on average during the first quarter. Eurozone economy shrunk 0.3 percent in the fourth quarter of 2011, marking the first contraction since the second quarter of 2009.

Economists are looking forward to any hint from Draghi on further ECB support. "With the full effects of the first two LTROs not yet clear, it is too early to expect the ECB to announce further such operations this month," Loynes at Capital Economics said.

"President Draghi won't entirely rule out further action to support the region's banks, should the dangers of a funding crisis resurge or the operations already conducted fail to encourage any pick-up in lending."

by RTT Staff Writer

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