European Central Bank Holds Primary Rate Constant

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The European Central Bank has kept all interest rates unchanged in its monthly meeting held today, Reuters reports. In a move widely anticipated by economists, the European Central Bank voted not to change any of its interest rates during its monthly meeting. The inaction is largely in line with expectations, given the bank’s unexpected move last month and the time needed to assess its efficacy.

In November, the central bank decided to slash its primary refinancing rate from 0.5 percent to 0.25 percent, reacting to a drop in inflation rates to 0.7 percent in October. The bank cited fears over s0-called “deflationary pressures,” a dreaded set of economic outcomes in which low inflation rates discourage spending throughout the economy.

With inflation rates rising only marginally in November, it would appear at first that further action would be needed to combat the problem. However, this is not true on a short-term basis. The ECB wants time to assess the impact of its rate decrease, and a time scale of several months will probably have to pass before any other actions are considered.

Several key representatives of the bank have hinted at what could be next for the bank if inflation — among other economic indicators — does not turn around soon. Peter Praet, one of the bank’s top economists, has toyed with the idea of established quantitative easing on the continent. While this presents the challenge of there not being a single bond for the eurozone, Praet believes that it is possible to circumvent the issue and to move forward with at least the consideration of the policy.

Vitor Constancio, the bank’s vice president, was quick to dismiss the notion that the bank was seriously considering lowering its deposit rate into negative territory. The idea had been discussed in media outlets as a way for the bank to lower rates without a further cut to the primary refinancing rate, but Constancio, along with several economists, has expressed doubts as to the impact of a negative interest rate for a large geographic area.

Another possibility could be the creation of a third long-term lending operation, or LTRO, which would pump billions of euros into the region’s banks. Though there is no official word on a timetable for such a plan, many analysts believe that early 2014 is the prime time when such a move would be considered. The initiative would have the advantage of bolstering liquidity in the region as well as staving off low inflation rates. For now, however, attention will be turned to Mario Draghi, the bank’s chief, as he gives the press conference that traditionally follows the bank’s meeting. Draghi presented projections for 2015 for the first time during the bank’s meeting today, a point that is sure to draw questions from the media. With Draghi having adopted a dovish tone in past encounters, his attitude may tell an interesting story as well.

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