ECB holds rates steady, sees no danger from strong euro

The European Central Bank held its key interest rates steady Thursday and hit back at French concern that the euro's recent strong rise poses a threat to recovery in the single currency area.

As widely predicted by analysts and ECB watchers, the central bank's policy-setting governing council voted to leave the main refinancing rate at a historic low of 0.75 percent, where it has been since July.

No ECB watcher had been expecting the central bank's chief Mario Draghi to announce any new policy measures, either in terms of interest rates or emergency anti-crisis measures, given the scope and extent of its previous actions.

And Draghi told a news conference that the decision not to alter rates had indeed been "unanimous" in view of the assessment that inflationary pressures are likely to remain contained in the 17 countries that share the euro and the region's economy should start recovering gradually later this year.

In addition to bringing down eurozone borrowing costs to their current record low, the ECB has pumped more than 1.0 trillion euros ($1.3 trillion) into the banking system via so-called LTROs to avert a disastrous credit crunch.

And it has also constructed a special new mechanism, labelled OMT, to buy up the sovereign bonds of the most vulnerable countries.

Draghi said its extensive armoury had indeed proven effective in helping the euro area turn the corner in its three-year-long crisis.

Eurozone banks have already repaid early a large chunk of their emergency loans and "this reflects the improvement in financial market confidence," he said.

Furthermore, the anticipated recovery in the eurozone economy "in the second half of the year" was largely thanks to the ECB's "accommodative monetary policy stance," he said.

"All actions we've taken will in the end find their way into the economy, so much so that we see gradual recovery in the second half of this year," Draghi said.

-- Confidence returning --

The ECB chief rejected concerns raised in France this week that the recent rise in the euro to its highest levels in over a year could trample the still tender green shoots of recovery.

"The appreciation is in a sense a sign of return of confidence in the euro," Draghi argued.

"By and large, both the nominal and real effective exchange rates are on ... or about their long term averages," he said, insisting that "the exchange rate is not a policy target."

The comments appeared to be directed at French President Francois Hollande who on Tuesday called for the eurozone to manage the euro's exchange rate.

Speaking at the European Parliament in Strasbourg, Hollande said "a single currency zone must have a foreign exchange policy otherwise it will see an exchange rate imposed on it (by the markets) which is out of line with its real competitive position."

Draghi retorted: "I think we should always remember that the ECB is independent ... let me say, we heard all over the world talking up, talking down currencies. The ultimate judgement of the effectiveness of this strategy is to see what markets make of these statements."

Germany, too, sees no cause for alarm in the euro's current level of around $1.35, arguing that from an historical point of view, the euro is currently not overvalued and that the recent rise is a counter-reaction to the massive depreciation in the wake of the eurozone crisis.

Analysts said the ECB would not be drawn into cutting rates still further to counter the negative impact of the euro's strength, at least for now.

"The ECB has no intention to intervene at this stage, not even verbally. It will wait to see some negative impact of the appreciation of the euro on growth and inflation before it feels it needs to act," said Marie Diron at Ernst and Young Eurozone Forecast.

"The appreciation of the euro has occurred simultaneously (and partly reflects) improved confidence in the eurozone's future. This is positive and to the extent that it allows companies to start investing and hiring again, the negative impact of the stronger exchange rate should be moderate," she said.

IHS Global Insight economist Howard Archer said that while he felt there was a compelling case for the ECB to cut rates further to 0.50 percent, "we doubt that it will do so.

"Instead, we suspect the ECB is likely to keep the rate at 0.75 percent through 2013 and, very possibly 2014 as well," the expert concluded.

--

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