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"

Related Stories

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."

More on This Story

Related Stories

The BBC is not responsible for the content of external Internet sites

More Business stories

RSS

BBC Business Live

  1.  
    07:35: ASOS PROFITS DOWN
    ASOS webpage screengrab

    Online retailer ASOS has reported as 14% slump in profits to £46.9m. Last year ASOS reported profits of £54.7m. There are no surprises here, though. The firm has previously warned about disruption from significant investment in its warehousing, the launch of its new business in China would hurt profits and that remains the case. Boss Nick Robertson says the firm is "in a period of major investment that comes at a short term cost, but the medium-term benefits will be significant."

     
  2.  
    07:20: ARM CHIPS
    chip

    ARM, which could well make the chips in your mobile phone, says it made $320m (£195.5m) of sales in the third quarter, up 12% compared with last year. It will probably sell $350m in the final three months of the year, it said.

     
  3.  
    07:10: RECKITT RESULTS
    Reckitt Benckiser products

    Reckitt Benckiser says it now expects full year revenue growth at the lower end of its total revenue growth target of 4-5%. The firm "delivered a robust performance in tougher markets in the third quarter" it said.

     
  4.  
    07:00: CHINA GROWTH BBC Radio 4

    China's economy grew by 7.3% in the three months to September, compared with expectations of 7.2%. But it's still the lowest growth in six years. The BBC's Chief Business Correspondent Linda Yueh tells the Today programme Chinese monetary policymakers want to slow the Chinese economic growth gradually and allow the rest of the world to get used to it. China is becoming a "middle income economy" she says and will revert to a normal path for a developed economy over time of around 3% to 4%.

     
  5.  
    Via Twitter Linda Yueh Chief business correspondent

    tweets: My interview with CEO of Oscar de la Renta fashion house, Alex Bolen, from Talking Business

     
  6.  
    06:41: ENGINEERING SKILLS Radio 5 live

    We don't have enough engineers in the UK or scientists for that matter argues Ann Watson of Semta, an engineering skills charity, on 5 live. She says: "We need a million scientists, engineers and technicians by 2020, We are starting to see a shortage in education; people training those recruits." The perception of engineering as a "dirty, oily industry" doesn't help, she says.

     
  7.  
    06:30: STOCK MARKET Radio 5 live

    Jane Foley, senior currency strategist at Rabobank is on 5 live talking about the falling stock market. "If we see stocks fall more we may see companies bargain hunting," she says. So more firms may start purchasing each other.

     
  8.  
    06:21: HEATHROW TRAVEL Radio 5 live
    heathrow

    Travel writer Simon Calder is on 5 live talking about the weather. He says he sees about 50 weather-related cancellations at Heathrow, so perhaps about 5% of flights so far. Flights to Frankfurt look hard to come by, he says.

     
  9.  
    06:12: FLIGHTS CANCELLED

    Heathrow airport has said this morning that around 10% of flights will be cancelled today as the remnants of Hurricane Gonzalo hit the UK. Flights with the 20 biggest carriers would be affected, it says. British Airways has already cancelled some ahead of the expected severe weather. The remains of the hurricane are predicted to bring heavy rain and gusts of up to 75mph in some areas, causing disruption to rush-hour travel. If you're travelling today it's worth checking before you arrive at the airport.

     
  10.  
    06:02: TOTAL CEO DEATH Radio 5 live

    Christophe de Margerie, the chief executive of French oil company Total, has died in an air crash in Moscow. Sarah Rainsford, the BBC's correspondent in Moscow says poor weather with low visibility is a possible cause of the crash. His plane crashed when it collided with a snow-clearing machine killing him and three crew, she tells 5 live.

     
  11.  
    06:01: Howard Mustoe Business reporter

    Good morning! Get in touch via email bizlivepage@bbc.co.uk or on twitter @BBCBusiness.

     
  12.  
    06:00: Matthew West Business reporter

    Morning folks, we have the latest public borrowing figures out at 9:30 today. But before that we have full year results from online retailer ASOS, and interim figures from Whitbread, plus the weather is promising to play havoc with the transport network today with 10% of flights out of Heathrow already cancelled this morning. We'll bring you everything as it happens.

     

Features

From BBC Capital

Programmes

  • Ade Adepitan at the ColosseumThe Travel Show Watch

    The challenge of providing disabled access at Europe’s leading ancient monuments

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.