News Column

ECB Holds Rates at Historic Low Despite Euro's Rise

Feb. 7, 2013
euro inflation

The European Central Bank (ECB) left interest rates unchanged at the historic low rate of 0.75 per cent Thursday, despite the recent sharp rise in the value of the euro.

Speaking at his regular monthly press conference, ECB President Mario Draghi said "the appreciation (of the single currency) is a sign of return of confidence in the euro."

The ECB believes the 17-member eurozone economy is now on course to a gradual recovery, but downside risks remain.

Hopes that the worst might be over for the eurozone's long-running debt crisis means that many analysts believe the ECB will not launch further emergency measures and will keep rates on hold possibly until the middle of next year.

Yet the euro's appreciation has raised fresh concerns that the stronger currency, combined with the eurozone's renewed political uncertainty, could place the currency bloc's recovery from recession at risk.

Analysts have expressed concerns that the stronger currency could undercut the eurozone's exports and consequently delay the region's recovery from recession.

After gaining ground in early morning trading, the euro edged down 0.4 per cent to 1.3462 dollars as Draghi was speaking to reporters. The single currency hit a 14-month high against the dollar on Friday.

In his comments, the ECB chief said the Frankfurt-based central bank also wants to assess the impact of the stronger euro on the currency bloc's inflation outlook.

"The exchange rate is not a policy target, but it is important for growth and price stability and we certainly want to see whether the appreciation is sustained," he said.

Draghi also waved off a series of questions about the scandal that has hit Italy's Monte dei Paschi di Siena Bank (MPS) as a result of losses at its derivative trading operations.

The scandal at Italy's third biggest bank dates back to the time when Draghi headed Italy's central bank, Banca d'Italia, between 2006 to 2011.

Expectations that Monte Paschi ran up millions of euros worth of losses from derivatives has sparked a major political row in Italy, just as the nation heads towards elections later this month.

But Draghi told reporters that Italy's central bank had set out the action it had taken in reports posted on its websites.

"The IMF has publicly said too that the Banca d'Italia took timely and appropriate action to address the problems at MPS."

The drama surrounding Monte Paschi and its impact on Italy's election campaign - polls are pointing to unpredictable results - have served to highlight investors' concerns about renewed political uncertainty in the eurozone.

Meanwhile, Spanish Prime Minister Mariano Rajoy is embroiled in a growing corruption scandal involving his ruling People's Party.

The scandals have resulted in a pickup in borrowing costs for both Italy and Spain.

Source: Copyright 2013 dpa Deutsche Presse-Agentur GmbH

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