ECB rejects deflation fears as it holds rates at 0.25%

Mario Draghi, President of the European Central Bank Mr Draghi said inflation would be low for "protracted period of time"

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The head of the European Central Bank (ECB) has said deflation is not a threat to the eurozone economy.

The ECB kept its benchmark interest rate at 0.25% after its latest meeting. The rate was cut to its current record low in November.

ECB president Mario Draghi said: "We have to dispense with this idea of deflation. The question is - is there deflation? The answer is no."

Eurozone inflation slowed to 0.7% in January from 0.8% in December.

The figure fuelled worries about whether the euro bloc could suffer deflation, potentially de-railing economic growth.

Analysis

Deflation, according to one commentator, is "the elephant in the room".

Not yet it isn't, according to Mario Draghi, the ECB President. Crashing around in the corridor outside perhaps, but it hasn't barged across the threshold into the ECB's Council room.

In his news conference, he posed himself a rhetorical question: "is there deflation? The answer is no".

But he did not claim there was no danger. And he repeated his insistence that the ECB is ready to consider all available policy instruments.

There are options. At least one is conventional - a further cut in interest rates, but they are so low already that the ammunition is almost spent.

Unconventional measures are possible but they are fraught with technical, political or even legal difficulties.

When he says the ECB is willing to take further decisive action if required, we should take him at his word.

But he is surely hoping that it won't be necessary.

However, the ECB believes the economies of the eurozone are recovering after the bloc emerged from recession last summer.

In addition to holding its benchmark rate at 0.25%, the ECB also left the rate it pays on bank deposits unchanged at zero.

At a press conference to explain the ECB's latest decision, Mr Draghi said: "There is going to be a low level of inflation for a protracted period of time, but deflation? No.

"The modest recovery is showing encouraging signs. The demand side is getting stronger, not weaker. We have to treat the recovery with extreme caution. It is very fragile. It is starting from very low levels but it is proceeding."

On Wednesday, Markit's Eurozone Composite Purchasing Managers' Index indicated that growth in the private sector last month was its strongest for two and a half years.

Stress tests

Holger Schmieding, chief economist at Berenberg Bank, believes the bank is right to believe the European economy is recovering : "Prices are stable. Leading economic indicators are close to trend.

"The European Commission's Sentiment Index is at 100.9 which is actually a little bit above trend. So the recovery is happening. Draghi should have acted earlier, but belatedly, the recovery is on track."

 German steelmaker ThyssenKrupp controlling a blast furnace in Duisburg European growth is recovering according to the ECB

Mr Draghi said the bank was also waiting for its own staff's projections for the region's economy for the next two years, due out in March, and the eurozone growth figures for the last quarter of 2013.

He said he believed that changes in monetary flows and credit conditions had been affected by banks cutting back on lending, ahead of the central bank's Asset Quality Review, a stress test of 128 banks due to take place this year.

"We have also been concerned about the high level of volatility in the emerging markets," he added. "We have to look through the high volatility to see if it is a temporary phenomenon or something that will stay for a prolonged period of time."

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