Interest Rates Held Steady in Europe and U.K. ; E.C.B. Sees Some Signs of Stabilization and Even of 'Positive Contagion'

By Jack Ewing; Julia Werdigier | International Herald Tribune, January 11, 2013 | Go to article overview

Interest Rates Held Steady in Europe and U.K. ; E.C.B. Sees Some Signs of Stabilization and Even of 'Positive Contagion'


Jack Ewing; Julia Werdigier, International Herald Tribune


The euro zone economy shows signs of stabilizing, the E.C.B. chief said Thursday, while the Bank of England kept its benchmark interest rate unchanged amid a dismal economic outlook.

The euro zone economy shows signs of stabilizing and may even be in a period of "positive contagion," Mario Draghi, the president of the European Central Bank, said Thursday as the bank left its main interest rate at a record low.

As usual, Mr. Draghi was careful to qualify his upbeat assessment of the euro zone crisis, which is now entering its third year. Though financial markets have calmed and some economic indicators have stabilized, he said, it was too early to declare a turning point.

Also Thursday, the Bank of England decided to keep its benchmark interest rate unchanged amid a dismal economic outlook for 2013 that could keep the economy on the brink of another recession.

Mr. Draghi listed a number of indicators that the euro zone could be on the mend. Market interest rates on government bonds have fallen, while stocks have risen. The flow of bank deposits from troubled countries has reversed and euro zone economies have become more competitive, he said.

Where problems in one country once infected other members of the currency union, optimism is now spreading, Mr. Draghi said at a news conference following the regular monthly monetary policy meeting of the E.C.B. Governing Council.

"There is a positive contagion when things go well," Mr. Draghi said. "That's what is in play now." But, he added, "the jury is still out. It's too early to claim success."

Mr. Draghi's comments suggested the E.C.B. would not cut its main interest rate further, as some economists have argued it should, given that unemployment is at a record high and inflation is close to the central bank's target of 2 percent and falling. Many businesses continue to have trouble getting credit, without which a recovery of the European economy is unlikely.

Some analysts read Mr. Draghi's comments as simply a way of justifying the central bank's inaction.

"Despite the pervasive weakness of the real economy in the single currency area, the E.C.B. is sitting firmly on its hands in the hope that the upturn in sentiment will eventually filter through to the real economy," Nicholas Spiro, managing director of Spiro Sovereign Strategy, said in a note Thursday.

But others agreed that there were tentative signs that the euro zone economy could emerge from an economic downturn soon. On Thursday, the Bank of France indicator of sentiment in French industry rose unexpectedly.

"Draghi is right to stress that several leading indicators have stabilized recently," Jorg Kramer, chief economist at Commerzbank, wrote in a note to clients. "The recession in the euro zone is likely to come to an end in spring. This makes a further E.C.B. rate cut unlikely."

While cutting interest rates is a standard policy tool of central banks, Mr. Draghi has often complained that the central bank has lost much of its influence over rates in troubled countries like Spain. …

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