The European Central Bank (ECB) announced March 7 that it would keep its main refinancing rate at 0.75 percent. There are also not going to be other non-standard simulative measures.
“Ample excess liquidity is likely to persist during the course of 2013,” writes Citigroup, which expected the ECB to remain on hold.
Overall economic performance in the Eurozone remains sluggish as GDP contracted 0.6 percent in the fourth quarter of 2012. Inflation is subdued, staying below the 2 percent target that the ECB has over the medium term.
These traditional measures indicate there would be room for a rate cut, but non-standard simulative measures have taken precedent in the wake of the European sovereign debt crisis. Banks refinanced $1.3 trillion at the end of 2011 and the beginning of 2012 in three year refinancing operations. These eclipsed the main refinancing operations that are akin to the open market operations of the Fed and determine the Fed funds rate.
ECB President Mario Draghi reiterated at the press conference March 6 that the “transmission mechanism” from the ECB to the real economy through banks does not work properly anymore. Banks have excess funds that they put on deposit with the ECB, but don’t lend out large sums to the real economy, due to lending risks or capital constraints. There is not much the ECB can do to force banks to lend apart from cutting rates the banks collect on their ECB deposits to negative.
Draghi, however, said on Thursday that this was not an option: “We’ve looked at that and we didn’t commit to do anything … The unintended consequences of a measure like that can be serious, as it has been shown in other monetary jurisdictions.”
The Epoch Times publishes in 35 countries and in 21 languages. Subscribe to our e-newsletter.