ECB President Mario Draghi also described as "relatively limited"
the benefits of one technical option for loosening lending
conditions, suggesting the bank will either do nothing or else take
bold policy action should the outlook deteriorate.
The ECB left its main interest rate at 0.25 percent, a move
generally expected by markets, and held the deposit rate it pays
banks for holding their money overnight at zero.
Draghi said the latest economic information suggested recovery was
on track and needed no extra push for now.
"We saw our (economic) baseline by and large confirmed," he told a
news conference after what he described as a "broad discussion" on
interest rates, and other policy instruments.
"The news that has come out since the last monetary policy meeting
is also, I would say, by and large on the positive side."
The euro jumped against the dollar to its highest since December and
to a peak against the yen not seen since January 23 after the ECB
signaled no need for new economic stimulus.
Inflation has been in what Draghi calls the "danger zone" below 1
percent for five months now and was running at 0.8 percent at the
The lack of action was significant, since last month Draghi had
signaled that by the March policy meeting the ECB would have enough
information to judge the need for fresh stimulus.
An ECB source had predicted before the meeting the ECB would agree
to stop operations to soak up money spent on Greek and other
countries' bonds at the height of the euro crisis. But the ECB held
off this option and Draghi played down the impact it would have.
RBS economist Richard Barwell said ending the drain operations would
have achieved little.
"So the message is 'we'll either do something meaningful, or nothing
at all'," Barwell said. "Token gestures are off the table."
Like the Bank of Japan, which meets to set policy next week, the ECB
is running out of room to cut interest rates, putting the onus on
alternative policy measures.
ECB policymaker Ewald Nowotny told Reuters last month that he and
his colleagues were nearing unanimity on the option to end the
so-called sterilization operations.
The resultant release of around 175 billion euros ($240 billion)
would have roughly doubled the amount of excess liquidity in the
financial system, helping to bring down interbank lending rates.
The move would also have marked a big philosophical shift and a step
towards U.S.-style quantitative easing (QE).
[to top of second column]
However, Draghi said there was no sign of back-door monetary
tightening via rising money-market rates and therefore no need to
act, for now at least.
"The benefits of such sterilization are relatively limited given the
short maturity of the bonds currently present in the SMP (sovereign
bond) portfolio," he said.
"So the injection of the liquidity would really last only a
relatively short time, less than a year for sure," he added.
New forecasts from ECB staff put inflation at 1.0 percent this year,
1.3 percent in 2015 and 1.5 percent in 2016 — below its target of
close to 2 percent all the way through the projection.
"Annual HICP (EU harmonized) inflation rates are expected to remain
at around current levels in the coming months," Draghi said.
"Thereafter, inflation rates should gradually increase and reach
levels closer to 2 percent."
The forecasts presume an unchanged exchange rate and falling oil
Draghi rejected comparisons with Japan's experience of deflation,
which became so entrenched that companies and households put off
spending on expectations of lower prices ahead, leading to two
decades of economic stagnation.
ECB policymakers have insisted that so far there is no sign of euro
zone citizens deferring spending plans.
The International Monetary Fund believes more needs to be done,
however. Reza Moghadam, head of the IMF's European Department, said
in a blog on Wednesday that the ECB should cut interest rates and
pump out more money, perhaps through QE.
"The analysis that we do at the present time ... diverges from what
the IMF is saying," Draghi said.
Turning to tensions in Ukraine, he said trade links were
insufficient to risk to suggest major risks for the euro zone.
But he described the growth impact on Russia as "severe", and said
"the geopolitical risks in the area could quickly become substantial
and generate developments that are unforeseeable and potentially of
($1 = 0.7278 euros)
(Writing by Paul Carrel and Mike Peacock;
editing by Jeremy Gaunt and Larry King)
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