ECB holds interest rates low as markets drop

European Central Bank held interest rates at record lows following tumbling market stocks, crude oil price drop

Photo by: Reuters
Photo by: Reuters

Journalists take notes as European Central Bank (ECB) President Mario Draghi addresses a news conference at the ECB headquarters in Frankfurt, Germany, January 21, 2016.


The European Central Bank held interest rates at record lows on Thursday, but the market crash, tumbling bank stocks and ebbing inflation may set the stage for action later in the year.

In December, the Governing Council cut the deposit rate, increased the charge on banks for parking money at the ECB, and expanded its purchase programme to buy chiefly government bonds.

This recent action, albeit short of what many on financial markets hoped for, meant that economists had expected the Thursday move and now shift their attention to possible action later in the year.

ECB President Mario Draghi, who holds his news conference at 1330 GMT, may address the threat of low inflation, as oil plunges, as well as the market reactions caused in part by weaker Chinese growth.

Draghi may also face questions about falls in the price of shares and bonds of several banks, particularly in southern European countries such as Italy. The cost of insuring against a default of many of these banks has risen sharply in recent weeks amid fears over unpaid loans, signalling bleak times ahead.

Having raised expectations too high in December, however, Draghi is likely to stop short of making concrete promises, emphasising instead the central bank's readiness and ability to act.

"The ECB is on hold for now," said Reinhard Cluse, an economist with UBS. "Draghi can say: 'we gave the medicine and now we have to let it work'".

Joerg Kraemer, an economist with Commerzbank, predicted a further reduction in the deposit rate in March.

A cut to its forecast for inflation then, which the ECB has pledged to keep at close to 2 percent, could prompt action.

TRTWorld, Reuters