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ECB promises to keep economy flush with liquidity
Economics

ECB promises to keep economy flush with liquidity

2 min. 02.10.2013 From our online archive
The European Central Bank held its key rates at all-time lows Wednesday and promised to do everything possible to prevent tightening market conditions from choking off recovery.

(AFP) The European Central Bank held its key rates at all-time lows Wednesday and promised to do everything possible to prevent tightening market conditions from choking off recovery.

At its monthly policy meeting the ECB's governing council voted to keep the bank's key "refi" refinancing rate steady at an all-time low of 0.50 percent.

At his traditional post-meeting news conference, Bank President Mario Draghi said he "expects the key ECB interest rates to remain at present or lower levels for an extended period of time."

This was based on the assumption that the inflation outlook will remain subdued, the ECB chief said.

Nevertheless, there has been concern that rising money market rates may choke off the still very tentative economic recovery in the 17 countries that share the euro.

"The risks surrounding the economic outlook for the euro area continue to be on the downside," Draghi said.

"Developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions."

ECB considering "all available instruments"

Money market rates in Europe have indeed been rising recently amid talk about a so-called "tapering" or winding down of anti-crisis measures by the US Federal Reserve on the other side of the Atlantic.

Draghi said the ECB remained "particularly attentive" to such developments.

And it was "ready to consider all available instruments" to curb an unwarranted tightening, he said.

These included a so-called LTRO or long-term refinancing operation with which the ECB already flooded eurozone banks with more than 1.0 trillion euros in cash at the end of 2011 and the beginning of 2012 in a bid to avert a potentially disastrous credit crunch.

However, there was no information given on when such a move could take place.

US shutdown a risk if protracted

Turning to the current US government shutdown, Draghi said it was not yet a threat to recovery, but could prove to be one if the political gridlock lasts.

"The US budget shutdown is a risk if protracted. At present time, the impression one has is that it will not be so," Draghi said.

But if it is, it would be "a risk for the US and the world recovery."

In Washington, the US government has shutdown for the first time in 17 years as Republicans and Democrats remain at loggerheads over the budget, with Democrats refusing to give in to Republican demands for cuts in President Barack Obama's flagship health law.

So far, investors seem unruffled by the crisis.

On the foreign exchange markets on Wednesday, the euro jumped on news that Italy's Silvio Berlusconi has abandoned his bid to topple the government.

The single currency hit an eight month high of 1.3595 USD from 1.3527 USD late in New York on Tuesday, and even briefly broke the 1.36 USD mark.