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ECB determined to prevent too low inflation, leaves borrowing costs unchanged


ECB determined to prevent too low inflation, leaves borrowing costs unchanged


The European Central Bank says it is determined to use all available means to prevent inflation falling too low.

Despite price rises slowing further into the deflation “danger zone” the central bank’s policymakers left interest rates unchanged.

That decision was widely expected despite news earlier this week that eurozone inflation slowed to 0.8 percent in December, a development ECB President Mario Draghi blamed on a one-off technical quirk in German service sector figures.

At their first meeting of the year, Draghi said: “By and large we don’t see a deflation in the Japanese sense of the 1990s.”

He added the central bank “strongly emphasised” its willingness to act boldly if needed to prevent any slide towards deflation

Draghi tried to sound upbeat about the eurozone’s recovery.

He told a news conference: “The recovery is there, but it is weak, it is modest, and as I said many times it is fragile, meaning that there are several risks – from financial to economic, to geopolitical, to political risks – that could undermine easily this recovery.”

But the international bond markets do feel there are enough signs of economic recovery for them to be buying Spanish, Portuguese and Italian government bonds.

On that issue Draghi said: “Confidence is gradually coming back; this is due certainly to the ECB action, but also – equally important – to the action by governments, both in fiscal consolidation, but also in some countries especially – which are by the way the ones that are now seeing the greatest benefit – also in undertaking the needed structural reforms.”

Those reform efforts, as well as expectations the ECB will keep interest rates low for a long period, or even cut them further, to support recovery, have investors piling into the ‘periphery’ countries they previously did not want to risk lending money to.

Spanish government bonds were snapped up at Madrid’s first sale of 2014 held on the same day the ECB met.

There was also strong interest in an offering of Portuguese debt as Lisbon prepares to end its international bailout support this year.

Even the pariah Greece is now being reconsidered.

This all follows Ireland’s strong return to borrowing markets after concluding its bailout.

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