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ECB keeps strategy intact in battle with low inflation

Feb. 6, 2014 at 11:13 AM   |   Comments

FRANKFURT, Germany, Feb. 6 (UPI) -- The European Central Bank left its key monetary policies in place Thursday pointing to a "moderate recovery" that was proceeding as the bank expected.

"We decided to keep the key ECB interest rates unchanged. Incoming information confirms that the moderate recovery of the euro area economy is proceeding in line with our previous assessment," said ECB President Mario Draghi at a news conference.

In spite of that, Draghi said the eurozone was "now experiencing a prolonged period of low inflation," indicating the point that low inflation had grown as a concern.

"Underlying price pressures in the euro area remain weak and monetary and credit dynamics are subdued," he said.

Economists fear that when prices trend lower in a period of so-called deflation, that economy stalls because purchases are put off on the expectation that prices will continue to drop.

The ECB lowered its key lending rates in November 2013, dropping its main bank-to-bank rate from 0.5 percent to 0.25 percent. It also lowered its marginal lending rate facility, generally used for emergency loans, 25 basis points to 0.75 percent.

At the time, Draghi said the increased liquidity was required for the 18-member currency region, "given the latest indications of further diminishing underlying price pressures in the euro area over the medium term, starting from currently low annual inflation rates of below 1 percent."

The bank has a target inflation rate of 2 percent.

But Draghi said policy makers are banking on a slow recovery. "Our previous assessment of economic growth has been confirmed," he said, predicting output in the eurozone to grow "at a slow pace."

"In particular, some improvement in domestic demand should materialize, supported by the [accommodating] monetary policy stance, improving financial conditions and the progress made in fiscal consolidation and structural reforms," he said.

© 2014 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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