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ECB to leave rates amid hopes for recession's end


August 01. 2013 1:45AM
Associated Press

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(AP) The recession in the euro area could be ending and that means the European Central Bank likely won't cut interest rates Thursday.


Economists say the bank's 23-member governing council will probably leave the benchmark lending rate at a record low of 0.5 percent when they meet in Frankfurt.


Lower rates could in theory stimulate the economy. But recent indicators such as surveys of purchasing managers have raised hopes that the recession in the group of 17 European Union countries that use the euro has bottomed out and could soon be returning to growth. Some economists think it could either show flat or slight growth for the April-June period or in the July-September quarter.


The economy of the 17 European Union members that use the euro shrank 0.2 percent in the first quarter, the sixth quarterly decline in a row.


In place of a rate cut, ECB President Mario Draghi will likely use his post-decision news conference to underline the bank's recent efforts to give markets more clarity.


He has promised rates will stay low "for an extended period." That's aimed at reassuring markets that the ECB is not at all ready to follow the U.S. Federal Reserve and talk about withdrawing emergency stimulus. Fed Chairman Ben Bernanke has said that the U.S. central bank could begin "tapering off" its bond purchases later this year and ending them next year if the U.S. economy continues to improve.


The Fed statements roiled stock and bond markets and sent some market interest rates higher, at least temporarily something the ECB does not want to see happen. The ECB wants to keep borrowing costs low, both so that businesses can borrow to expand and European over-indebted governments can continue to finance their debt loads while they try to straighten out their finances.


Draghi may also underline Thursday the bank's new communication style.


Last month the ECB president used the press conference to tell markets that rates would stay low. The technique, called "forward guidance", is a way of keeping markets from misjudging what the central bank will do and from overreacting. It has also been used by the Fed and the Bank of England.


This Thursday could see Draghi talking about his proposal for the ECB to publish the minutes of its governing council meetings, as do the Fed, the Bank of England and the Bank of Japan. Instead of publishing minutes, the ECB has so far offered a detailed statement and made the bank president and vice-president available at a news conference immediately after each rate decision.


Some economists think the ECB could cut its benchmark refinancing rate at least once more if the recovery does not arrive on time. However, the problem is that further cuts might not do much good. Even the current low rate at which the ECB lends to banks is not getting through to companies in the countries that need it most, such as Spain and Italy. That is because banks there have strained finances that restrict their lending.


Associated Press


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