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ECB rejects deflation fears as it holds rates at 0.25%

February 6, 2014

PARIS The European Central Bank on Thursday left its benchmark interest rate unchanged and said it would wait for additional data before deciding whether to address evidence that the Eurozone is sliding into deflation.

European Central Bank (ECB) president Mario Draghi said there is no Eurozone deflation problem.

"We have to dispense with this idea of deflation. The question is - is there deflation? The answer is no," said Draghi.

He acknowledged at a news conference that the 0.7 percent inflation rate in January was lower than expected and said that it would remain low over the coming months but then gradually climb back to the bank's target of just below 2 percent.

He added that a moderate economic recovery continued in the final quarter of 2013 and that interest rates would stay low "for an extended period of time." He reiterated that the bank was prepared to take decisive action if conditions warrant it.

Many economists said that the ECB was now all but certain to take action at its March 6 meeting.

Eurozone inflation slowed to 0.7% in January from 0.8% in December.

The figure fuelled worries about whether the euro bloc could suffer deflation, potentially de-railing economic growth.

But Draghi did not claim there was no danger. And he repeated his insistence that the ECB is ready to consider all available policy instruments.

The turmoil in emerging markets may have the potential to affect the European recovery, Draghi said, adding that the central bank was analyzing whether the volatility was a temporary phenomenon or would persist for a long time.

The ECB., which sets monetary policy for the 18 nations that share the euro currency, is trying to restore growth in a region where more than 19 million people are officially listed as unemployed.

The bank held the benchmark interest rate steady despite a recent official report that showed that consumer prices rose at an annual rate of only 0.7 percent in January, the fourth consecutive monthly reading below 1 percent.

The ECB's target for an economically healthy inflation rate is just below 2 percent. Economists say that the current low rate is indicative of an economy so sluggish that businesses and consumers see little reason to invest and spend.

European growth is recovering according to the ECB

Draghi said the bank was also waiting for its own staff's projections for the region's economy for the next two years, due out in March, and the Eurozone growth figures for the last quarter of 2013.

He said he believed that changes in monetary flows and credit conditions had been affected by banks cutting back on lending, ahead of the central bank's Asset Quality Review, a stress test of 128 banks due to take place this year, according to BBC.

"We have also been concerned about the high level of volatility in the emerging markets," he added. "We have to look through the high volatility to see if it is a temporary phenomenon or something that will stay for a prolonged period of time."

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Source: Big News Network (United Arab Emirates)

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