ECB holds rates despite Cyprus

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ECB holds rates despite Cyprus

ECB holds rates despite Cyprus
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As expected, the European Central Bank has kept the cost of borrowing unchanged at a record low of 0.75 percent.

ECB President Mario Draghi and his policymakers are waiting to see whether the eurozone economy stabilises, or if the recent slew of weak economic data is the start of another downturn.

After early signs of improvement in the eurozone economy at the start of the year, March marked a set back as Cyprus narrowly escaped a financial meltdown by securing a last-minute bailout and Italy struggled to end a post-election deadlock.

At his post-meeting news conference Draghi faced questions on the central bank’s view of the economy and the Cyprus rescue deal in which rich depositors in its banks had to forfeit some money.

“In the coming weeks, we will monitor very closely all the incoming information on economic and monetary developments, and assess the impact on the outlook for price stability,” Draghi said.

Asked about Cyprus’s initial decision to charge a levy on insured as well as uninsured banks depositors, Draghi said that was a mistake.

“That was not smart, to say the least, and was quickly corrected,” he said.

Draghi also told reporters that Cyprus’s bailout, including hitting wealthy depositors with losses, was not what would happen in further bailouts: “Cyprus is no template.”

As the world recovers from the financial crisis, the ECB has lent less support to the bloc’s economy than its peers in Japan, the United States or Britain, which have launched massive asset purchase programmes with new money and cut rates closer to zero.

Grim figures

A survey released earlier on Thursday showed the eurozone’s economic decline dragged on unabated in March, marked by a huge drop in French business activity that outstripped even the downturns in Spain and Italy.

Eurozone economic sentiment has fallen after four months of gains, surveys showed manufacturing in the region fell deeper into decline and inflation eased to 1.7 percent, departing further from the ECB’s target of below, but close to 2.0 percent.

Low rates, but low loans

The ECB’s main worry is that its low rates are not reaching households and firms in the eurozone periphery, mainly because banks’ funding costs in crisis stricken countries are higher than those in the core countries, pushing up loan costs.

This affects small and medium-sized companies in particular as they have few alternatives to bank funding.

Draghi said after the March policy meeting that the ECB was studying ways to address the issue, but that they were not planning “anything special”. Since then, several policymakers have said a number of options were being looked at.