July 23, 2014
ECB holds rates to assess deflation threat
The European Central Bank left interest rates unchanged today, holding off policy action while it waits for new economic forecasts next month to assess the deflation threat facing the euro zone.
A sharp drop in euro zone inflation to 0.7 percent in January, well below the ECB's target of just under 2 percent, would have focused the minds of the bank's policymakers.
The ECB held its main rates at 0.25 percent, left the deposit rate it pays on bank deposits at zero and held its marginal lending facility - or emergency borrowing rate - at 0.75 percent.
"Unchanged rates was our expectation today, though we suspect it may have been a close call and may disappoint some," said Nick Matthews, economist at Nomura.
The euro rose after the ECB announcement and German Bund futures extended falls.
Money market traders had expected no change in rates, nor any other steps to combat falling inflation or prop up the euro zone, a Reuters poll taken on Monday showed.
The ECB is wary of inflation getting stuck in what ECB President Mario Draghi has dubbed a "danger zone" below 1 percent. The bank has vowed to keep rates at present or lower levels for an "extended period".
The Governing Council met against the backdrop of turmoil in emerging markets which risks forcing the euro higher - a scenario that could put more downward pressure on prices.
The emerging market ructions and January's inflation drop throw next month's ECB staff projections into sharp relief - a downward revision could prompt policy action.