The European Central Bank left interest rates at a record low on Thursday, holding off fresh action for now while it assesses whether it needs to respond to cost-of-living numbers weak enough to raise concerns about deflation.
The decision to hold the main rate at 0.25 percent, which was widely expected, came despite news earlier this week that euro zone inflation slowed to 0.8 percent in December - well below the ECB's target of just below 2 percent.
"We expect President Draghi to continue to emphasise that the ECB is ready and able to act if required," said Nomura economist Nick Matthews. "We also expect the ECB to say there are a number of instruments available, though we do not expect them to single out any one at this stage."
ECB watchers will nonetheless be listening for any hints about the central bank's preferred tools for holding down market interest rates, which have begun to creep up as banks repay ECB loans, pulling liquidity stimulus from the system.
With the ECB's main interest rate so low and its toolbox depleting, the threshold for further policy easing has risen, even as the central bank worries about slow price rises.
"We must be very careful that we do not permanently fall below 1 percent inflation and thus into the danger zone," Draghi told German weekly Der Spiegel last week.
But he added: "We see no need for immediate action."
Economic recovery, while weak, has proceeded as the ECB has expected, giving it time to see whether inflation picks up.
LIQUIDITY
Low inflation is not the central bank's only concern. A lack of lending and receding excess liquidity - the amount of money in the market on top of what banks need for their day-to-day operations - are adding to its dilemma.
Excess liquidity - the money from ECB loans - almost halved overnight to 157 billion euros ($213.53 billion) as banks took up fewer funds from the ECB, which has reduced liquidity further by offsetting its bond purchases.
Early repayments of three-year central bank loans resume next week, meaning even more funds will be siphoned out of the markets, helping push money market rates up more.
Draghi has repeatedly said banks returning money to the ECB is a positive sign and has said interbank markets are working better. But if banks hoard less cash, borrowing costs rise.
Source: Reuters
The decision to hold the main rate at 0.25 percent, which was widely expected, came despite news earlier this week that euro zone inflation slowed to 0.8 percent in December - well below the ECB's target of just below 2 percent.
"We expect President Draghi to continue to emphasise that the ECB is ready and able to act if required," said Nomura economist Nick Matthews. "We also expect the ECB to say there are a number of instruments available, though we do not expect them to single out any one at this stage."
ECB watchers will nonetheless be listening for any hints about the central bank's preferred tools for holding down market interest rates, which have begun to creep up as banks repay ECB loans, pulling liquidity stimulus from the system.
With the ECB's main interest rate so low and its toolbox depleting, the threshold for further policy easing has risen, even as the central bank worries about slow price rises.
"We must be very careful that we do not permanently fall below 1 percent inflation and thus into the danger zone," Draghi told German weekly Der Spiegel last week.
But he added: "We see no need for immediate action."
Economic recovery, while weak, has proceeded as the ECB has expected, giving it time to see whether inflation picks up.
LIQUIDITY
Low inflation is not the central bank's only concern. A lack of lending and receding excess liquidity - the amount of money in the market on top of what banks need for their day-to-day operations - are adding to its dilemma.
Excess liquidity - the money from ECB loans - almost halved overnight to 157 billion euros ($213.53 billion) as banks took up fewer funds from the ECB, which has reduced liquidity further by offsetting its bond purchases.
Early repayments of three-year central bank loans resume next week, meaning even more funds will be siphoned out of the markets, helping push money market rates up more.
Draghi has repeatedly said banks returning money to the ECB is a positive sign and has said interbank markets are working better. But if banks hoard less cash, borrowing costs rise.
Source: Reuters
