The decision to hold the main rate at 0.25 percent, which was widely
expected, came despite news earlier this week that euro zone
inflation slowed to 0.8 percent in December — well below the ECB's
target of just below 2 percent.
Attention now shifts to ECB President Mario Draghi's 1330 GMT news
conference, at which he will explain the reasoning behind this
"We expect President Draghi to continue to emphasize that the ECB is
ready and able to act if required," said Nomura economist Nick
Matthews. "We also expect the ECB to say there are a number of
instruments available, though we do not expect them to single out
any one at this stage."
ECB watchers will nonetheless be listening for any hints about the
central bank's preferred tools for holding down market interest
rates, which have begun to creep up as banks repay ECB loans,
pulling liquidity stimulus from the system.
With the ECB's main interest rate so low and its toolbox depleting,
the threshold for further policy easing has risen, even as the
central bank worries about slow price rises.
"We must be very careful that we do not permanently fall below 1
percent inflation and thus into the danger zone," Draghi told German
weekly Der Spiegel last week.
But he added: "We see no need for immediate action."
Economic recovery, while weak, has proceeded as the ECB has
expected, giving it time to see whether inflation picks up.
Low inflation is not the central bank's only concern. A lack of
lending and receding excess liquidity — the amount of money in the
market on top of what banks need for their day-to-day operations — are adding to its dilemma.
Excess liquidity — the money from ECB loans — almost halved
overnight to 157 billion euros ($213.53 billion) as banks took up
fewer funds from the ECB, which has reduced liquidity further by
offsetting its bond purchases.
Early repayments of three-year central bank loans resume next week,
meaning even more funds will be siphoned out of the markets, helping
push money market rates up more.
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Draghi has repeatedly said banks returning money to the ECB is a
positive sign and has said interbank markets are working better. But
if banks hoard less cash, borrowing costs rise.
The ECB said last month it was watching these developments closely
and was "ready to consider all available instruments."
Moreover, lending to companies in the bloc shrank at the fastest
pace on record in November and the difference in corporate loan
costs around the bloc grew. This suggests the ECB's low rates are
still not filtering into all countries.
Last month, Draghi said the ECB would ensure that any new long-term
central bank money flowed to the real economy instead of being used
by banks to buy government bonds.
However, the ECB is unlikely to announce any steps yet as it
monitors the progress in its bank asset-quality review scheduled to
start next month.
Draghi has proven to be more nimble on policy than his predecessor
Jean-Claude Trichet, who preferred to flag policy moves with key
phrases in his statements.
And with the dovish side of the governing council in the ascendancy
for now, there is a greater possibility of more abrupt action — if
council members can agree how to act.
"I have the impression that while there is in principle a readiness
to act, the governing council members don't seem to agree on what
exactly should be done and what would really be effective," said
Commerzbank economist Michael Schubert. ($1 = 0.7353 euros)
(Additional reporting by Eva Taylor
and Paul Carrel; editing by Jeremy Gaunt)
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