FRANKFURT: The European Central Bank kept its gunpowder dry again on Thursday, holding its key interest rates unchanged for the fifth month in a row. The ECB left its central "refi" or refinancing rate unchanged at 0.25 percent at its monthly policy meeting, it said in a statement.
The central bank also held its other two key rates -- the marginal lending rate and the deposit rate -- unchanged at 0.75 percent and zero percent respectively. The ECB last pared back eurozone borrowing costs in November.
And while few ECB watchers had been betting on a further cut this month, there is still some expectation that the central bank may ease monetary conditions in the 18 countries at some point to ward off the spectre of deflation. For the time being, ECB officials reject suggestions that the euro area is in danger of slipping into deflation -- the destructive spiral of falling prices in which consumers put off purchases, thus destroying salaries, jobs and investment.
The EU statistics agency Eurostat put area-wide inflation at just 0.5 percent in March, down from 0.8 percent in February. That is way below the ECB's target of just under 2.0 percent. ECB President Mario Draghi was scheduled to explain the reasoning behind the decision at a news conference. Newedge Strategy analyst Annalisa Piazza said she expected Draghi "to keep all options on the table" and keep his assessment "dovish" or open to further monetary easing.
"We signalled some risks for a cut but the move would have been more a 'cosmetic' signal rather than a strong tool to fight the current disinflationary scenario," Piazza said. Capital Economics economist Jonathan Loynes said "we still think the ECB will probably have to act again at some point to boost the sluggish recovery and address the risks of deflation in the currency union."
It appeared that a majority of governing council members had judged that neither of the two conditions for further policy action -- a worsening of the inflation outlook and a tightening of money markets -- had been met over the last month, Loynes sid.
"But Draghi is likely to keep the door to more action wide open at the press conference, firmly restating the ECB's forward guidance and perhaps repeating last month's increased emphasis on the large amount of spare capacity in the economy.
"He will no doubt also stress again that the ECB has further policy weapons at its disposal," Loynes sid. While there was no guarantee of further policy loosening ahead, "if we are right in expecting the economic recovery to remain far too weak to erode the slack in the economy and hence head off the risk of inflation, the pressure on the ECB to follow words with action will surely grow," the expert said.
"We maintain our forecast of another small cut in interest rates later in the year," he concluded.
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