ECB keeps rates on hold, cuts down on meetings

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Associated Press

Posted on July 3, 2014 at 7:00 AM

Updated Thursday, Jul 3 at 11:32 AM

The European Central Bank is taking a leaf out of the Federal Reserve's book and will, starting next year, set monetary policy every six weeks instead of every month and publish minutes to its deliberations.

After the bank decided to keep its interest rates on hold Thursday, ECB President Mario Draghi told a press briefing the new timetable was not a sign the bank's job in getting the 18-country eurozone back on track was done.

He said a meeting every month can cause excess volatility in the markets as traders look for action that is not always merited by economic fundamentals such as growth and inflation.

"Maybe we should move to a 6-month schedule," he quipped.

Though Draghi insisted that the ECB would not be synchronizing its meetings with the Fed, their timetables are now very similar. The Fed meets eight times a year, usually every six weeks.

The minutes are also a big development, as they will shed more light on policymakers' thinking and bring the ECB in line with most other major central banks. More transparency from the ECB has been a demand of many in the financial markets over the past few crisis-filled years.

Marc Ostwald, a senior strategist at ADM Investor Services International, noted that the publication of the minutes may however undermine Draghi's aim to have less market volatility around the ECB.

"With 8 meetings a year and an additional 8 meeting minutes release dates, the fact is that there will in principle be more, rather than less 'event risk' surrounding ECB policy," he said.

Draghi on Thursday also fleshed out details of the ECB's latest plan to flood commercial banks with up to 1 trillion euros ($1.36 trillion), one of the measures it announced last month, along with interest rate cuts, to help the economy and nudge up inflation. One of the problems afflicting the eurozone is that banks often hold back from lending to businesses and households.

Draghi said the program of loans to banks will help drive inflation back to the target of just below 2 percent from 0.5 percent currently. Under the program, banks can bid for the loans on a quarterly basis, either alone or in a group with other banks. That money would have to be loaned on to businesses, in the hope of boosting investment.

Draghi said the recovery in the eurozone remained moderate and that inflation was subdued, but claimed long-term inflation expectations were "firmly anchored."

"Geopolitical risks, as well as developments in emerging market economies and global financial markets, may have the potential to affect economic conditions negatively, including through effects on energy prices and global demand," Draghi said. Markets have been shaken recently by violent clashes in Ukraine and Iraq as well as gyrations in fast-growing economies like Brazil and Turkey.

Another risk Draghi identified was that eurozone governments might slow down in reforming their economies. European government borrowing rates have dropped in recent months, taking pressure off to make reforms. The yield on 10-year Spanish bonds, for example, is now at the same level as that of U.S. Treasurys.

Draghi said the ECB's key interest rate will remain at the current level of 0.15 percent or lower for an "extended period of time" and that the ECB's governing council was unanimous in its commitment to use other monetary stimulus measures should inflation stay too low for too long. Low inflation, and in particular falling prices, can weigh on an economy as consumers delay spending in hope of bargains later.

Economic indicators suggest the eurozone needs all the help it can get. On Thursday, official figures showed retail sales were flat in May while the June purchasing managers' index — a gauge of business activity — from financial information company Markit fell to a 6-month low.

The high value of the euro has also been a cause for concern. The currency remains relatively strong against the dollar, even though the Fed is discussing when it will start raising rates. Higher rates tend to boost the value of a currency.

Though Draghi stressed that the ECB does not target a value for the euro, he noted the currency's strength was a problem through its effect on prices — its high value tends to make imports cheaper.

The euro fell Thursday, though that was mainly due to a strong U.S. jobs report. The currency was down at $1.3610 from $1.3650 before the U.S. report. Though it's down on its multi-year high of near $1.40 in the spring, the euro is well above its long-run average.

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