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ECB: Not time yet for an 'exit strategy'

ECB president Mario Draghi
Image caption ECB president Mario Draghi announced that European interest rates will stay at 1%

The European Central Bank has said it will not yet roll back the emergency measures it implemented to contain the eurozone debt crisis.

"Any 'exit strategy' talk for the time being is premature," ECB president Mario Draghi said after its latest monthly meeting.

He has previously said the worst of the crisis is over.

The ECB recently took the unusual step of lending more than 1tn euros ($1.3tn; £828bn) of low-interest loans to banks.

The ECB provided 530bn euros of low-interest loans to 800 banks across the whole of the European Union - including 37.4bn euros to UK banks - in February, after 489bn euros were lent out in December.

Eurozone leaders also recently agreed to boost joint lending power of the "firewall" - its bailout funds - from 500bn euros to 800bn euros.

'Sufficient wage adjustment'

But since the eurozone central bank stopped buying the government bonds of countries such as Italy and Spain last year, borrowing costs for governments in the eurozone have been rising again.

The yield on Spain's 10-year bond has risen to 5.61%, compared with 4.9% a month ago and on Wednesday, the country raised 2.6bn euros from investors in mid-term loans, almost at the bottom end of what it was seeking.

Mr Draghi said that there were still risks related to a renewed intensification of tensions in euro-area debt markets. However, he said that he expected the economy to grow modestly over 2012.

He warned the eurozone's governments, without singling any out, that they must honour their commitment to reducing and containing debt.

"National policy-makers need to fully meet their responsibilities to ensure fiscal sustainability, to increase the adjustment capacity of product and labour markets, to enhance productivity and competitiveness, and to ensure the soundness of their financial system.

"In particular, countries which have suffered losses in cost competitiveness need to ensure sufficient wage adjustment and foster productivity growth."

Italy and Spain are trying to avoid the fate of Greece, Portugal and the Republic of Ireland by making severe cuts to public spending amid much public protest.

Jonathan Loynes, an economist at Capital Economics, found the ECB president to be "distinctly non-committal with regard to the possibility of further unconventional policy support", such as its cheap loans.

"The ECB has done its job by propping up the banks. It is now up to governments to address the bigger economic and fiscal problems facing the region," he said.

Inflation

The ECB has not moved rates since November, when it made its second consecutive cut.

Mr Draghi also said inflation was likely to stay above 2% in 2012, although there were risks it could rise again, with a particular threat from higher commodity prices.

The most recent official estimate for March for the eurozone showed inflation at 2.6% in March, slightly down on 2.7% in the previous three months.

Mr Draghi said that inflation should fall below 2% early next year.

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