ECB holds interest rates at historic low

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ECB holds interest rates at historic low

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The European Central Bank has held interest rates at an historic low of 0.05 percent.

But President Mario Draghi said the bank will judge early next year if it needs to take more action with the strongest indication yet the ECB could be willing to buy government debt.

“Should it become necessary to further address risks of too prolonged a period of low inflation the governing council remains unanimous in its commitment to using additional unconventional instruments within its mandate. This would imply altering early next year the size, pace and composition of our measures. In response to the request of the Governing Council, ECB staff and the relevant eurosystem committees have stepped up the technical preparations for further measures,” he told reporters.

If prices start falling it could discourage consumers from spending while they wait for cheaper goods so creating a vicious circle that pulls down the economy. Inflation which was at 0.3 percent last month on an annual basis is far below the ECB’s target of just below 2 percent.

“The answer is structural reform allied with the monetary easing and maybe some more fiscal stimulus ahead. We all know that, but structural reform is very difficult to do. On the monetary side, well clearly Mario Draghi is pulling all the levers that he can,” explained Trevor Williams, Chief Economist Commercial Banking, Lloyds Bank.

Getting agreement to launch money-printing quantitative easing could be one political lever which won’t move. Germany, the bloc’s biggest economy and its most influential fears such a move would encourage reckless borrowing and fuel inflation in future.